HP 
5356 

S?6e      Schoch   - 
Eleirents   of 

p 

Southern  Branch 
of  the 

University  of  California 

Los  Angeles 

Form  L-1 

5Xe 


This  book  is  DUE  on  the  last  date  stamped  below. 


.rt-8,'21 


ELEMENTS   OF 
BUSINESS 


BY 
PARKE  SCHOCH . 

Principal  of  West  Philadelphia  High  School  for  Girls 
and 

MURRAY  GROSS 

Head  of  Department  of  Commerce,  West  Philadelphia 
High  School  for  Girls 


AMERICAN   BOOK  COMPANY 

NEW  YORK  CINCINNATI  CHICAGO 

BOSTON  ATLANTA 


Copyright,  1918,  by 
PARKE  SCHOCH  AND  MURRAY  GROSS 

ELEMENTS   OF   BUSINESS 

W.  p.     5 


cv 

0 


PREFACE 

Much  is  heard  on  all  sides  to-day  of  efficiency  —  efficiency 
in  affairs  of  government,  in  business,  in  the  professions; 
efficiency,  indeed,  in  all  our  public  and  commercial  relation- 
ships. At  the  same  time  much  is  being  done  through 
special  forms  of  education  and  of  training  to  improve  the 
quaUty  of  the  service  everywhere.  Is  it  not  strange,  then, 
that  in  this  nation-wide  campaign  for  higher  standards 
and  better  methods,  we  quite  overlook  the  source  of  the 
trouble,  or,  if  we  recognize  it,  make  Uttle  or  no  effort  to 
remove  it? 

If  we,  as  a  people,  are  inefficient  in  the  administration  of 
pubhc  affairs,  of  commercial  enterprises,  or  of  professional 
interests,  is  it  not  because  we  are  primarily  inefficient  in  the 
management  of  our  own  personal  and  family  matters? 
All  about  us  we  see  the  failure  of  men  and  women  to  make 
progress  in  mercantile  or  in  professional  enterprises,  just 
because  they  do  not  understand  the  elementary  principles 
underlying  all  business  relationships. 

Likewise  in  the  home  we  are  witnesses  continually  to 
the  futile  efforts  of  people  to  make  ends  meet,  because 
through  positive  lack  of  knowledge  on  the  subject  they  are 
employing  the  most  wasteful  methods  in  the  administration 
of  the  family  budget.  Here  Hes  the  key  to  the  whole  prob- 
lem. If  we  set  about  systematically  to  inform  and  to  train 
the  young  people  of  this  day  in  sound  methods  of  personal 
finance,  we  shall  at  the  same  time  be  preparing  them  in  the 
best  manner  possible  for  an  economical  use  of  their  powers 

3 


4  Preface 

and  resources  in  the  larger  and  more  responsible  positions 
of  later  life. 

Permeating  all  our  secondary  school  courses  to-day  is  the 
idea  of  the  appUcation  of  the  instruction  to  the  life  needs  of 
the. pupils,  —  first  to  their  vocational  requirements,  and, 
second,  to  the  larger  question  of  successful  living.  Why  is 
it  that  so  many  schools,  no  matter  how  many  specialized 
courses  they  may  offer,  require  that  every  boy  shall  take 
a  minimum  of  training  in  the  manual  arts  and  that  every 
girl  shall  take  a  minimum  of  training  in  the  household  arts  ? 
Because,  much  as  the  vocational  idea  may  differentiate 
people  in  their  studies  and  in  their  wage-earning  activities, 
there  are  certain  duties  in  life  common  to  all,  for  the 
proper  discharge  of  which  an  elementary  knowledge  of 
these  homely  arts  is  indispensable. 

Why  should  we  not  insist  similarly  on  a  certain  minimum 
study,  somewhere  in  the  school  career  of  every  boy  and 
girl,  of  the  elements  of  business  as  a  necessity  for  success  in 
every  field?  However  skilled  a  man  may  be  in  science  or  in 
art,  if  at  the  same  time  he  is  ignorant  of  everyday  business 
routine,  he  is  at  the  mercy  of  unscrupulous  people  with 
whom  he  may  deal.  Or,  however  skilled  a  woman  may  be 
in  the  domestic  arts,  if  she  does  not  know  the  best  methods 
of  buying,  sa\dng,  and  investing,  she  is  seriously  handi- 
capped. These  are  matters  touching  the  lives  of  all,  and 
they  are  of  such  vital  import  in  the  stress  of  mere  living 
that  they  should  find  a  place  in  the  educational  program  of 
every  school. 

As  a  contribution  to  this  important  field  of  study,  the 
authors  offer  the  following  chapters  on  business  methods 
essential  to  successful  living. 


CONTENTS 

PART  I 
EXCHANGE,  MONEY,  AND  CREDIT 

PAGE 

I    General  Principles       7 

II    Money  System  of  the  United  States 11 

III  Bills,  Invoices,  and  Statements  of  Account  14 

IV  Commercial  Drafts 19 

V    Promissory  Notes .     .  24 

VI    Indorsement  and  Protest 30 

PART  II 
BANKING  AND  SAVINGS  INSTITUTIONS 

VII    General  Principles  and  Classification 35 

VIII    Commercial  Banks 38 

IX    Depositing  in  a  Commercial  Bank 42 

X     Commercial  Bank  Checks 46 

XI     Commercial  Bank  Certified  Checks  and  Other  Instruments  50 

XII     Commercial  Bank  Collections  and  Settlements  ....  54 

XIII  Commercial  Bank  Loans  and  Discounts 58 

XIV  Savings  Banks 62 

XV    Cooperative  Banks  and  Building  and  Loan  Associations  .  68 

XVI    Private  Banks 73 

PART  m 

INSURANCE 

XVII     Insurance  Principles        .77 

XVIII     Life  and  Accident  Insurance     .  .81 

XIX    Fire  Insurance .90 

5 


Contents 


PART  IV 

PROPERTY 

PACE 

XX    General  Principles 96 

XXI    Leases 101 

XXII    Bills  of  Sale  and  Deeds        103 

XXIII  Mortgages 107 

XXIV  Distribution  of  Property  Estates 110 

XXV    Taxation 115 

PART  V 

INVESTMENTS 

XXVI    Bond  Investments 122 

XXVII    Stock  Investments 129 

XXVIII    Bond  and  Stock  Market 134 

XXIX    Mortgage  and  Real  Estate  Investments 139 

PART  VI 
LETTER  WRITING 

XXX    Business  Letters 144 

XXXI     Addressing  Envelopes 152 

XXXII     Special  Forms  of  Letters  and  Telegrams 156 


PART   VII 
PERSONAL  ACCOUNT  RECORDS 

XXXIII  Cash  Records 165 

XXXIV  Classification  Cash  Book 169 

XXXV    Elementary  Principles  of  Accounting 173 

Supplementary  Questions 187 

Reference  Books 210 

Index 213 


PART  I 

EXCHANGE,  MONEY,  AND  CREDIT 

I.    GENERAL  PRINCIPLES 

Business  exchange  is  the  peaceful  process  of  satisfying 
human  wants.  The  business  community,  with  its  complex 
methods  and  its  numerous  institutions,  is  the  organized 
means  of  affording  the  facilities  necessary  to  carry  on  this 
exchange  in  a  convenient  and  orderly  way.  At  the  begin- 
ning of  a  study  of  the  elements  of  business,  it  will  be  helpful 
to  glance  briefly  at  the  character  of  the  business  community 
and  at  the  nature  of  some  of  the  principal  factors  under- 
lying it. 

Barter.  Under  primitive  conditions  business  exchange 
presented  itself  in  the  form  of  two  men  engaged  in  trading 
objects,  each  giving  something  he  did  not  want  for  some- 
thing he  did  want.  With  the  development  and  the  expan- 
sion of  business  relationships,  however,  this  simple  method  of 
exchange,  known  as  barter,  became  cumbersome  and  there- 
fore unsatisfactory.  So,  in  our  day,  while  in  fact  men  are 
still  bartering  or  trading  objects  to  satisfy  their  wants,  the 
process  of  exchange  is  so  concealed  by  the  improved  means 
and  methods  used  to  effect  it  that  the  persons  concerned 
do  not  realize  that  bartering  or  trading  is  going  on. 

Money.  Several  means  have  been  employed  to  secure 
greater  convenience  and  power  in  exchange.  Of  these  the 
first  to  be  noted  is  money.     In  barter,  objects  of  actual 

9 


8  Exchange,  Money,  and  Credit 

utility  are  exchanged  under  conditions  of  immediate  advan- 
tage in  the  trade.  In  early  times  skins  were  traded  for 
dried  fish,  as  in  our  own  times  in  the  rural  districts  eggs 
are  exchanged  for  sugar.  As  business  experience  ripened, 
however,  the  community  found  that  some  things,  for 
various  reasons,  were  always  in  demand  and  that  these 
in  consequence  could  be  accepted  in  exchange  for  other 
things,  held  for  a  time,  and  later  traded  again.  Any 
object  so  esteemed  by  the  community  became  a  medium  of 
exchange,  a  medium  by  which  trading  was  done,  or  in  the 
terms  of  the  modern  business  world,  money. 

In  different  communities  various  articles  served  the 
purposes  of  money.  The  long  list  of  things  that  have  been 
used  as  money  in  times  past  includes  such  widely  dififering 
commodities  as  dried  fish,  animal  skins,  cattle,  wheat,  salt, 
wampum,  fishhooks,  tobacco,  and  iron.  Any  of  these,  at 
the  proper  time  and  place,  was  accepted  in  exchange  for 
other  things,  and  was  later  used  to  pay  for  something  that 
the  holder  found  necessary  for  the  satisfaction  of  his  wants. 
In  this  way  iron,  zinc,  copper,  silver,  and  gold  became 
money  commodities.  Eventually,  in  the  civilized  and  highly 
organized  communities,  gold  and  silver  displaced  all  the 
baser  metals.  They  are  now  distinctively  the  money 
metals,  although  copper  and  nickel  are  still  used  in  coins  of 
small  denominations. 

Gold  and  silver  displaced  other  money  commodities  for 
many  reasons,  some  of  the  most  important  of  which  are 
the  following : 

(i)  Owing  to  the  difficulties  that  accompany  their  pro- 
duction, they  show  high  value  in  small  quantity. 

(2)  They  can  be  readily  and  accurately  divided  and  con- 
verted into  coins. 


General  Principles  9 

(3)  They  are  beautiful  and  durable,  and  therefore  highly 
prized  by  all  communities. 

(4)  They  have  in  general  shown  a  world-wide  uniformJty 
in  value,  which  makes  them  highly  suitable  as  a  medium 
of  exchange  in  trading  between  different  communities  as 
well  as  among  traders  in  the  same  community. 

Credit.  The  use  of  credit  may  be  looked  upon  as  the 
second  means  that  has  made  possible  the  rapid  develop- 
ment of  the  modern  commercial  community.  There  are 
conditions,  of  course,  under  which  money  is  used  every 
time  a  want  is  satisfied.  When,  however,  transactions  are 
numerous  and  extend  over  an  area  widely  separating  the 
parties  involved,  the  use  of  money  would  be  inconvenient 
and  often  impossible.  Moreover,  the  use  of  money  would 
limit  business  transactions  to  the  amount  of  actual  money 
available  in  a  community  and  to  the  slow  movement  of 
money  in  exchange.  Such  difficulties  have  been  eliminated 
by  the  use  of  credit. 

Credit  may  be  defined  as  the  power  or  the  right  to  secure 
something  at  the  present  time  for  an  equivalent  to  be 
given  at  a  future  time.  From  the  definition  it  must  be 
concluded  that  the  use  of  credit  rests  upon  the  trust  and  tlie 
confidence  that  prevail  among  traders,  or  buyers  and  sellers. 
At  the  foundation  of  its  use  lie  two  judgments :  first, 
that  the  one  who  has  promised  will  be  able  to  fulfill  the 
promise  ;  second,  that  he  will  be  willing  to  do  so. 

It  is  estimated  that  only  about  5  %  of  the  business 
transactions  of  the  United  States  are  settled  with  money ; 
95  %  are  eventually  settled  by  the  offset  of  one  credit 
claim  against  another.  This  emphasizes  the  importance 
of  a  reputation  for  honesty  and  integrity  in  meeting 
obligations,  and  the  advantage  of  developing  in  the  business 


10  Exchange,  Money,  and  Credit 

community  a  condition  of  confidence  as  the  most  im- 
portant basis  of  success  in  Hfe. 

When  confidence  is  lacking,  business  transactions  on  a 
credit  basis  are  rendered  difhcult,  if  not  entirely  impossible, 
and  credit  relationships  can  be  entered  into  only  on  the 
basis  of  some  kind  of  definite  assurance  that  the  promise 
will  be  fulfilled.  This  is  known  as  "  providing  security." 
Even  under  normal  conditions  of  confidence,  this  need  for 
supplementary  assurance  gives  rise  to  many  contracts 
known  in  general  as  securities. 

Business  Customs  and  Institutions.  As  a  result  of 
credit,  great  business  institutions  have  developed  that  are 
designed  to  handle  credit  transactions  and  to  organize  and 
make  available  the  credit  of  individuals.  In  our  day, 
banking,  insurance,  and  other  business  enterprises  asso- 
ciated with  the  use  of  credit  perform  an  important  service 
in  enabling  business  affairs  to  be  conducted  with  conven- 
ience and  security.  Furthermore,  as  a  result  of  the  use 
of  credit,  customs  and  methods  of  doing  business  have 
arisen  requiring  the  use  of  many  business  papers  and 
instruments  involved  in  the  collection,  transference,  and 
security  of  credit  relationships.  Such  instruments  must 
be  understood  and  used  with  care,  in  order  to  safeguard  the 
interests  of  the  parties  to  the  contract. 

QUESTIONS  AND  EXERCISES 

1 .  How  does  the  present  method  of  satisfying  wants  differ 

from  the  means  employed  by  primitive  peoples? 

2.  What  are  the  most  important  industries  of  your  com- 

munity and  immediate  neighborhood  ? 

3.  Why   has   specialization   in   industry   emphasized   the 

importance  of  exchange? 


Money  System  of  the  United  States  ir 

Notice  the  kinds  of  food  served  at  one  of  your  din- 
ners, and  Ust  the  place  or  places  from  which  each  of 
the  articles  of  food  comes. 

Trace  the  journey  in  exchange  of  each  item  discussed 
under  the  previous  question  from  its  origin  to  the 
store  from  which  it  was  bought. 


II.   MONEY   SYSTEM    OF   THE   UNITED    STATES 

While  many  business  transactions  are  settled  without 
the  use  of  money,  yet  this  is  still  the  medium  in  terms  of 
which  the  exchange  values,  or  prices,  of  commodities,  of 
wages  and  salaries,  of  rents,  and  of  all  kinds  of  pubHc  and 
private  obligations  are  expressed.  Money  is  also  the 
standard  of  deferred  payments.  Contracts  are  constantly 
made  that  promise  to  pay  debts  at  a  future  date,  and  it  is 
money  that  serves  as  a  standard  in  making  the  pajTuent 
when  due.  The  reliability  and  the  stability  of  credit  trans- 
actions depend  to  an  important  extent  on  the  reliabihty 
and  the  stability  of  the  monetary  system  of  the  country. 

Metal  Money.  It  will  be  interesting,  therefore,  to  note 
briefly  the  monetary  system  of  the  United  States.  At  the 
heart  of  the  system  is  the  dollar.  Congress  has  declared 
that  23.22  grains  of  fine  gold  or  25.8  grains  of  gold,  nine 
tenths  fine,  properly  coined,  is  a  dollar,  —  the  unit  in  terms 
of  which  the  values  of  other  things  are  to  be  expressed. 
For  convenience,  gold  coins  have  been  issued  containing 
two  and  a  half,  five,  ten,  and  twenty  times  the  weight  of 
gold  in  the  dollar ;  these  are  known  respectively  as  the 
quarter  eagle,  the  half  eagle,  the  eagle,  and  the  double 
eagle  ($2^,  $5,  $10,  $20). 


12  Exchange,  Money,  and  Credit 

For  valuations  less  than  a  dollar,  silver,  nickel,  and  copper 
are  used.  At  the  head  of  the  silver  coinage  is  the  silver 
dollar,  which,  as  Congress  prescribes,  contams  371.25 
grains  of  silver.  The  other  silver  coins  are  the  half  dollar, 
the  quarter  dollar,  and  the  dime,  containing  respectively 
173.61  grains,  86.805  grains,  and  34.722  grains.  Nickel 
and  copper  are  used  in  the  five-cent  piece,  and  copper  and 
tin  and  zmc  in  the  one-cent  piece. 

Congress  does  not  attempt  to  fix  the  value  of  its  coins  in 
exchange.  It  limits  its  action  to  safeguarding  the  form, 
the  weight,  and  the  fineness  of  the  coins  issued,  and  to 
directing  the  government  to  hold  itself  ready  to  give  a 
gold  dollar  for  a  silver  dollar  upon  application. 

Paper  Money.  Besides  the  metal  money  to  which  ref- 
erence has  been  made,  the  government  of  the  United  States 
has  issued  a  number  of  different  kinds  of  paper  money. 
Each  of  these  is  a  promise  of  the  government  to  deliver 
directly  or  indirectly  a  number  of  gold  dollars  upon  de- 
mand. 

First,  the  United  States  note,  or  greenback,  is  a  promise 
of  the  government  to  pay  the  holder  a  specified  number 
of  dollars  on  demand. 

Second,  the  gold  certificate  arises  from  a  provision  of  the 
government  whereby  gold,  either  as  coin  or  bullion,  may  be 
deposited  in  the  United  States  Treasury  and  certificates 
equal  to  the  amount  of  the  gold  may  be  issued. 

Third,  the  silver  certificate  rests  upon  a  provision  of  the 
government  for  deposit  in  the  Treasury  of  silver  coins  and 
for  issue  of  certificates  of  deposit  therefor,  to  avoid  the 
inconvenience  of  handling  the  silver. 

Fourth,  the  treasury  note  arises  from  a  privilege  similar 
to  that  extended  to  owners  of  sUver  bullion. 


Money  System  of  the  United  States  13 

Fifth,  the  national  bank  note  is  a  promise  of  a  national 
bank  to  pay  the  holder  the  amount  named  on  the  note  in 
legal  tender  money  of  the  United  States.  Such  notes  are 
secured  by  a  deposit  of  United  States  bonds  with  the 
treasurer  of  the  United  States,  which  are  forfeited  and 
sold  to  redeem  the  obhgations,  if  the  promises  are  not 
fulfilled. 

Sixth,  the  new  Federal  reserve  note  is  a  note  issued  by 
a  Federal  reserve  bank,  to  serve  as  a  kind  of  emergency 
currency,  upon  the  security  of  commercial  paper  and  a 
certain  percentage  of  gold. 

There  are  other  forms  of  paper  money  of  varying  im- 
portance, but  as  they  are  not  in  current  use,  it  will  not  be 
necessa^  to  consider  them  here.  All  the  paper  currency, 
however,  promises  payment  of  legal  tender  money,  and  as 
all  legal  tender  money  practically  implies  final  settlement, 
directly  or  indirectly,  in  gold,  the  entire  money  system  of 
the  United  States  ultimately  rests  upon  the  gold  dollar. 
The  character  of  the  gold  dollar  is  fixed  by  Congress ;  but 
its  value  is  determined  by  intricate  economic  conditions, 
a  discussion  of  which  is  beyond  the  scope  of  this  study. 

Legal  Tender.  In  conclusion-  it  may  be  added  that  at 
the  present  time  the  legal  tender  money  of  the  country 
—  that  is,  money  which  by  the  declaration  of  the  govern- 
ment must  be  accepted  in  settlement  of  debts  —  includes 
any  gold  coins,  silver  dollars,  United  States  notes  or  green- 
backs, treasury  notes,  and  reserve  notes,  as  well  as  fractional 
silver  currency  to  the  amount  of  ten  dollars,  and  nickel  and 
copper  coins  to  the  amount  of  twenty-five  cents.  Gold  and 
silver  certificates  and  national  bank  notes  are  not  legal- 
tender  money,  but  pass  as  freely  in  exchange  as  any  of  the 
other  kinds  of  money. 


14  Exchange,  Money,  and  Credit 

QUESTIONS   AND    EXERCISES 

1.  What  causes  the  ditYcrciice  in  size  between  a  silver  dollar 

and  a  gold  quarter  eagle  ? 

2.  Why  is  not  iron  used  for  money  instead  of  gold? 

3.  Read  the  wording  on  a  one-dollar  bill.     What  is  the 

difference   between   it   and   a   silver   dollar?     What 
gives  the  paper  money  value  in  exchange  ? 

4.  In  what  ways  would  a  man  be  inconvenienced  if  he  held 

much  property  but   absolutely  no   money?     Could 
he  get  along  comfortably  without  the  latter  ? 

5.  Secure  as  many  examples  of  paper  money  as  possible, 

and  compare  the  promises  made  by  the  government 
in  the  different  kinds. 

m.   BILLS,   INVOICES,   AND    STATEMENTS   OF 
ACCOUNT 

As  many  transactions  take  place  on  the  basis  of  credit, 
or  on  account,  several  types  of  business  instruments  or 
papers  have  come  into  use  to  effect  payment  and  settle- 
ment at  a  future  date.  First  among  these  papers  may  be 
mentioned  bills,  invoices,  and  statements  of  account. 

Bills  and  Invoices.  A  bill  is  an  itemized  statement  of 
goods  sold  or  of  services  rendered.  When  accompanying 
or  following  a  shipment  of  goods  as  a  memorandum  of  the 
shipment,  it  is  frequently  called  by  the  buyer  an  invoice. 
It  should  show  the  names  of  the  parties  buying  and  selling, 
the  date  and  the  place  of  the  sale,  the  kind,  the  quantity, 
and  the  price  of  the  goods  sold,  or  the  nature  of  the  work 
done,  and  the  terms  of  the  sale. 

When  a  bill  is  paid,  it  is  customary  for  the  one  to 
whom  payment  is  due  to  receipt  the  bill  by  writing  at  the 


Bills,  Invoices,  and  Statements  of  Account       15 


bottom,  "  Received  payment  "  or  "  Paid  "  and  his  signa- 
ture, together  with  the  date  on  which  payment  is  made. 
If  another  person  receives  the  payment  for  the  one  to 
whom  it  is  due,  it  is  usual  for  him  to  affix  his  own  name 
after  writing  the  name  of  the  one  entitled  to  payment ; 
as,  "  Jones,  Dudley,  and  Company,  per  A.  T.  Lansing." 

Bill  of  Service 


Bangor,  Maine,  of&fdtem^&v  2,  /<^/S 
To  HENRY   S.  JOHNSON,  «Z)r. 


/?% 


^oA-> 


00 


Bill  of  Goods 


Philadelphia,  Pa.,  September  2,    1918 
Mr.  Alfred  J.   Smith,   Jr., 

'Bought  of  JONES,    DUDLEY,    AND   COMPANY 
Terms:  30  days  net 

1  bbl. "Standard  Flour  10.00 
^  doz.  cans  Tomatoes       2.60 
^  doz.  cans  Corn                2.50 

Paid 

JONES,   DUDLEY,  AND  COMPANY 
Per  a.   S-.  jCana^Ucf 

10 

1 
1 

00 
30 
25 

12 

55 

i6 


Exchange,  Money,  and  Credit 


Statements  of  Account.  A  statement  of  account  shows, 
in  addition  to  the  indebledjicss,  the  payments  made  toward 
settling  the  debt,  as  well  as  any  offset  credits  in  favor  of  the 
debtor.  If  an  invoice  was  delivered  to  the  buyer  at  the 
time  of  the  purchase  of  the  goods,  it  is  not  customary  to 
list  the  items  of  purchase  on  the  statement.  Under  such 
circumstances  the  statement  simply  gives  the  amount  and 
the  date  of  each  purchase  ''  As  per  bill  rendered."  If  an 
invoice  was  not  delivered,  .the  statement  is  itemized  the 
same  as  a  bill.  The  following  statement  of  account  shows 
a  part  payment  and  an  offset  credit  for  goods  that  were 
returned.  When  finally  paid  in  full,  a  statement  of  account 
is  receipted  in  the  same  way  as  a  bill. 


Baltimore,  Md.,  September  2,   1918 

Mr.   J.  H.   Baxter, 

New  Orleans ,  La. 

To  THE   BALTIMORE   GROCERY  COMPANY,   Dr. 

July 
Aug. 

1 

1 

To  Mdse .  per  bill  rendered 
If       II         11        II          It 

Cr. 

140 
50 

00 
00 

190 

July 
Aug. 

5 
1 

By  Mdse.  returned 
By  check 

Balance  due 

30 
150 

00 
00 

180 

10 

Cash  and  Trade  Discounts.  Reductions  or  allowances 
from  the  amount  of  a  debt  are  known  as  discounts. 

Many  business  houses  permit  buyers  thirty,  sixty,  or 
ninety  days  in  which  to  pay  their  bills;  but,  as  an 
encouragement  of  prompt  payment,  they  allow  a  certain 
per  cent  of  the  total  amount  of  the  bill  ^s  a  cash  discount 


Bills,  Invoices,  and  Statements  of  Account       17 

if  the  debt  is  paid  before  the  expiration  of  the  credit 
period,  as  5  %  off  if  the  debt  is  paid  in  ten  days,  and  2^  % 
off  if  it  is  paid  in  twenty  days.  Such  discounts  are  stated 
as  follows : 


Philadelphia,  Pa.,  September  2,  1918 

WINANT   AND    DRAKE 
Fine  Imported  and  Domestic  Dry  Goods 

Sold  to  McWilliams  and  Jones, 

Boston,  Mass. 

Terms  :   1  %  10  days  or  net  30  days 


20  yd.  Silk 
25  doz.  Hose 

Less  1%   discount 


1.00 
2.40 


Rec'd  payment 

9/S/18 
WINANT  AND  DRAKE 


20 

00 

60 

00 

80 

00 

80 

79 

20 


Manufacturers  and  wholesale  dealers  usually  allow 
those  who  buy  in  large  quantities  a  trade  discount,  which 
is  a  per  cent  to  be  deducted  from  the  total  amount  of  the 
bill.  Frequently  several  trade  discounts  are  allowed,  as, 
2o%,  io%,  and  5%.  The  20%  is.  first  deducted;  then 
10%  from  the  remainder;  then  5%  from  the  second  re- 
mainder.    If  there  is  a  cash  discount,  this  is  deducted  last. 

Assignment  of  Bills.  The  right  to  payment  of  a  debt 
may  be  transferred  by  Writing  across  the  back  of  the  bill 
or  the  statement  of  account,  "  In  consideration  of  .  .  . 
dollars,  the  receipt   of   which  is  hereby  acknowledged,    I 

EL.  OF  BUS.  —  2 


1 8  Exchange,  Money,  and  Credit 

hereby  sell  and  assign  to  ...  ,  the  within  account,  and 
I  hereby  authorize  the  said  .  .  .  ,  to  collect  it,"  together 
with  the  signature  of  the  one  to  whom  payment  is  due. 

Receipt  when  Bill  Is  not  Rendered.  In  the  settlement 
of  a  debt  for  which  a  bill  or  a  statement  of  account  has 
not  been  rendered,  the  pa5niient  should  be  accompanied 
by  a  written  receipt  as  follows : 


Chicago,  111.,    191 

Received  of 

: Dollars 

(Signature) 


QUESTIONS   AND    EXERCISES 

1.  Draw  up  an  original  bUl  for  some  service  that  you  have 

performed. 

2.  Gather  together  several  bills,  and  study  the  difierence 

in  their  headings  and  their  form. 

3.  What  essentials  are  common  to  all  forms  of  bills? 

4.  Draw  up  a  lawyer's  bill  for  services  in  defending  a  suit 

for  Robert  Lee.  Assume  that  you  are  the  lawyer 
and  that  your  professional  fee  is  $275.  The  court 
costs  amount  to  $30.  A  registration  fee  of  $3.50 
is  involved  and  the  services  of  a  stenographer, 
employed  for  seventeen  hours  at  $1.00  an  hour. 

5.  Draw    up    a    cabinetmaker's    bill    for    remodeling    an 

antique  sideboard.  Assume  that  you  are  the  cabinet- 
maker. Extra  materials  cost  you  $175,  and  lab.or 
employed,  $50.  In  addition,  one  dollar  is  spent  to 
secure  delivery  of  the  piece  of  furniture. 


Commercial  Drafts  19 

IV.    COMMERCIAL   DRAFTS 

Development  and  Form.  A  second  type  of  business 
instrument  used  to  effect  settlement  and  payment  of  a 
debt  is  the  commercial  draft.  In  its  origin,  the  commercial 
draft  is  an  order  by  one  person  on  another  to  pay  a  third 
person  a  specified  sum  of  money  on  demand  or  at  a  definite 
time.  The  person  who  draws  the  draft  is  known  as  the 
drawer ;  the  one  drawn  upon,  as  the  drawee ;  and  the 
one  to  whom  it  is  made  payable,  as  the  payee. 

Two-party  Sight  Draft 


At  sight   

Pay  to  the  order  of Tflifi^elj- 

Value  received,  and  charge  to  the  account  of 
To  Q'k.o-yyvaA'  jaii&Q^, 


Under  earlier  conditions  of  trade,  this  method  of  settling 
indebtedness  constituted  a  convenient  and  reUable  form, 
particularly  when  the  drawee  and  the  payee  lived  in  the 
same  community.  Its  advantage  showed  itself  in  re- 
lieving the  drawee  from  sending  to  the  drawer  a  sum  of 
money  over  long  distances,  which,  in  early  times,  was 
accompanied  by  many  risks.  Under  the  improved  con- 
ditions of  modern  exchange,  these  risks  have  been  greatly 
reduced.     Consequently  the  original  use  of  the  commercial 


20  Exchange,  Money,  and  Credit 

draft,  involving  three  parties,  has  been  reduced  to  a  form 
that  Imiits  the  transaction  to  two  parties,  the  drawee  and 
the  drawer,  the  former  remitting  directly  to  the  latter 
through  channels  for  such  purposes  established  by  com- 
mercial banking  institutions.  The  old  form  is  known  as 
a  three-party  draft;  the  restricted  form,  as  a  two-party 
draft. 

Two-party  Time  Draft  with  Acceptance 


SfOOQ<l  ^^ttC&,  W-aJv.,  c^e^^tey>v{y&v  2,  Kf/8 

Thirty  days  aft^r  date 

Pay  to  the  order  of Mv- - -LJJC9^^'' v 

Value  ruiti4€d}  ^^ pMiTge  I  \.Q^{^  account  of 

To    clko-yy^oii^  ^ant^, 

fSo-aZcyyv,  Tflao^. 


WTien  the  draft  is  payable  at  sight  or  on  demand,  it  is 
additionally  designated  by  being  called  a  sight  draft  or  a 
demand  draft ;  if  a  specified  time  is  allowed  before  payment 
of  the  instrument  by  the  drav/ee  is  required,  it  is  known  as  a 
time  draft.  Under  the  latter  circumstances,  however,  in 
order  to  be  regarded  as  an  obligation  of  the  drawee,  business 
practice  requires  such  a  draft  to  be  accepted.  This  means 
that  the  drawee  indicates  his  willingness  to  pay  the  re- 
quested amount  by  writing  across  the  face  of  the  instru- 
ment "  Accepted,"  together  with  his  signature,  and  some- 
times the  place  of  pa\Tnent.  When  a  time  draft  reads 
*'  after  sight,"  the  drawee  must  date  his  acceptance.    When 


Commercial  Drafts  21 

once  thus  accepted,  a  time  draft  is  commonly  known  as 
an  acceptance,  mider  which  title  it  passes  in  the  business 
world. 

Use  of  Commercial  Drafts.  As  an  illustration  of  the 
practical  use  of  commercial  drafts,  let  us  assume  that  James 
Madison,  of  Chicago,  Illinois,  is  indebted  to  Henry.  Long- 
streth,  of  Denver,  Colorado,  for  $250.  In  the  process  of  col- 
lecting the  debt,  the  latter  may  draw  either  a  sight  draft  or  a 
time  draft  upon  the  former.  If  either  form  is  used,  the  draft 
may  be  made  payable  to  himself  or  to  a  commercial  bank 
in  Denver,  which  is  made  the  agent  in  collecting  the  debt. 
If  the  drawer  makes  the  draft  payable  to  himself,  he  must 
transfer  to  the  bank  the  right  of  collection  by  indorsing 
the  draft,  that  is,  by  writing  on  the  back  of  it  "  For  col- 
lection, pay  to  the  order  of  (name  of  bank),"  together  with 
his  signature.  In  either  case  the  bank  then  sends  the 
draft  to  its  own  banking  agent  in  Chicago,  which  presents 
it  to  the  drawee. 

If  the  draft  is  a  sight  draft,  its  requirements  are  met  only 
by  immediate  payment,  and  in  due  course  the  amount  in- 
volved is  remitted  to  the  bank  in  Denver,  which  then  gives 
the  drawer  credit.  If,  on  the  other  hand,  the  draft  is  a 
time  draft,  the  agent  bank  in  Chicago  presents  it  to  the 
drawee  for  acceptance,  as  indicated  on  page  20.  Upon 
securing  acceptance  of  the  draft,  it  is  customary  for  the 
agent  bank  to  hold  the  draft  until  it  is  due,  and  then  to 
demand  payment,  upon  which  remittance  is  made  to 
the  drawer  in  the  same  way  as  in  the  case  of  a  sight 
draft. 

Special  Uses  of  Commercial  Drafts.  For  some  time  it 
has  been  more  or  less  a  practice  to  make  use  of  commercial 
drafts  to  secure  payment  for  goods  sent  under  circum- 


22 


Exchange,  Money,  and  Credit 


stances  in  which  the  credit  of  the  buyer  is  uncertain. 
This  is  done  by  attaching  to  the  bill  of  lading,  or  the  trans- 
portation receipt  for  the  goods  in  transit,  a  draft  calling  for 
either  pa>TTient  or  acceptance  before  delivery  of  the  goods. 
The  draft,  by  thus  accompanying  the  bill  of  lading  (which 
is  forwarded  by  way  of  the  commercial  banking  system), 
compels  the  purchaser  to  pay  or  dehnitely  to  obUgate 
himself  to  pay  for  the  goods  before  they  are  released. 
This  use  of  the  bill  of  lading  with  draft  attached  is  widely 
employed  in  some  lines  of  business. 


hln-7/  ^ 


'°/ 


TRADE       A  QC  E  P  T  A  N  C  E 

NEW    YORK^^^S:^*^^!^X- 


(^Zi'-^^^^  ,<geU^^^^ 


THE  ORDER  OF 


The  recent  practice  of  attaching  to  the  invoice  a  draft 
for  acceptance  is  gaining  favor.  This  procedure  may 
or  may  not  be  accompanied  by  the  allowance  of  a  special 
cash  discount,  as  under  old  conditions,  to  encourage 
prompt  payment  or  acceptance.  Such  drafts  are  called 
trade  acceptances. 

A  trade  acceptance  is  a  draft  drawn  by  the  seller  on 
the  purchaser  of  goods,  and  accepted  by  the  purchaser. 

For  example,  in  the  above  illustration,  VV.  Cosgrove  and  Co 
have  bought  goods  to  the  value  of  $3712.18  from  John  Barrow  and 


Commercial  Drafts  23 

Co.,  on  sixty  days'  time.  On  receipt  of  the  goods,  W.  Cosgrove 
and  Co.  accept  a  draft  drawn  by  the  seller,  and  made  payable  when 
the  bill  matures,  that  is,  sixty  days  after  April  26,  1Q17.  After  in- 
dorsing this  acceptance,  the  seller  can  discount  it  in  a  bank,  as 
explained  in  a  later  lesson,  and  the  Federal  reserve  bank  (see  p.  40) 
will,  if  required,  rediscount  it  for  its  member  banks.  In  this  way 
the  seller  can  inmiediately  convert  the  account  into  cash  or  bank 
credit,  although  the  buyer  is  not  required  to  pay  the  bill  until  maturity. 

The  use  of  trade  acceptances  is  helping  to  strengthen  and 
render  negotiable  much  business  credit  that  was  formerly 
not  readily  convertible  into  bank  credit. 

QUESTIONS  AND   EXERCISES 

1.  What  circmnstances  make  it  convenient  and  desirable 

to  make  use  of  a  commercial  draft?  What  advan- 
tages accrue  from  the  use  of  such  a  draft  ? 

2.  Why  were  three-party  drafts  more  commonly  used  in  the 

past  than  they  are  under  modern  conditions  ? 

3.  Assume  that  Richard  R.  Grant,  of  Boston,  owes  you 

$150.  Draw  a  two  party  sight  draft  to  collect  this 
amount.  What  steps  will  your  bank  take  to  assist 
you  in  the  collection?  What  steps  should  you  take 
to  inform  Mr.  Grant  that  you  are  drawing  on  him? 

4.  Assume  that  you  owe   J.  W.  Burt,  of  Chicago,  $500. 

He  draws  a  thirty-day  time  draft  on  you,  and  sends 
it  through  the  Chicago  Continental  Bank  for  collec- 
tion. Find  out  as  nearly  as  possible  the  course  of 
this  draft  from  the  time  it  is  presented  to  the  Chicago 
bank  to  the  time  it  is  presented  to  you. 

5.  Why  is  the  indorsed  trade  acceptance  readily  acceptable 

to  a  bank  for  discount? 

6.  State  the  advantages  of  trade  acceptances. 


24  Exchange,  Money,  and  Credit 

V.    PROMISSORY   NOTES 

Definition  and  Purpose.  A  promissory  note  is  a  promise 
in  writing  made  by  one  person  or  party  to  pay  another  a 
given  amount  of  money  at  a  stipulated  time.  The  person 
or  party  making  such  a  promise  is  called  the  maker  of  the 
note,  and  the  one  to  whom  the  amount  is  to  be  paid  is 
designated  as  the  payee. 

The  promissory  note  is  a  special  kind  of  business  instru- 
ment which  has,  as  compared  with  the  check,  a  limited 
application  to  the  incidental  business  affairs  of  people 
generally.  It  would  be  better  if  the  average  person  never 
availed  himself  of  such  an  instrument,  for  its  avoidance 
means  prompt  payment  of  indebtedness,  a  condition 
highly  desirable  in  domestic  and  personal  business  relations. 
The  promissory  note,  however,  serves  a  useful  purpose  in 
the  commercial  world,  since  it  enables  business  men  to  buy 
more  freely  on  credit  than  they  could  by  a  mere  verbal 
promise  to  pay. 

The  promissory  note,  therefore,  indicates  a  credit  trans- 
action, but  all  credit  transactions  are  not  accompanied  by 
such  a  note.. 

For  instance,  you  may  buy  on  a  month's  credit  all 
your  household  provisions,  and  if  you  pay  your  bills  in 
cash  at  the  end  of  each  month,  you  will  have  no  need 
for  a  promissory  note.  If,  however,  you  have  not  the 
money  with  which  to  pay  your  January  provision  bill,  and 
your  grocer  will  not  supply  your  February  needs  without 
some  agreement  in  writing  by  you  to  settle  the  January 
account  within  a  definite  time,  you  may  offer  him,  and  he 
may  accept,  your  promissory  note  for  the  overdue  amount. 
This  note  would  take  the  following  form : 


Promissory  Notes  25 

Promissory  Note 


Q.'Yve^  'yylO■'}^Uh  after  date  I  promise  to  pay  to  the  order  of 
^&ve''\yvLc^k  /ifcmt&u 

Value  received,  w-ltk  VnteA^ect  at  6% 

£tiv&  iTiave-Zh  /,  /^/8  ^w&ui.cyK  /if alt 


Important  Features  of  a  Good  Note.  Every  note  must 
be  signed  by  the  maker.  It  must  designate  the  payee 
by  name,  and  must  promise  to  pay  a  definite  sum  to  him 
or  to  his  order.  It  should  be  dated,  although  absence  of 
date  does  not  invalidate  the  promise.  It  should  be  filled 
in  with  ink,  but  the  instrument  is  just  as  legal  and  binding 
if  written  with  pencil.  The  amount  of  money  involved 
should  be  written  both  in  figures  and  in  words.  Should 
these  for  any  reason  not  agree,  the  written  amount  is  ac- 
cepted as  correct. 

Non-Essentials  of  a  Note.  It  is  still  common  to  write 
in  the  notes  the  words  "  Value  received,"  in  order  to  show 
consideration  underlying  the  transactions.  Many  notes, 
however,  pass  hands  daily  without  these  words.  Another 
survival  of  old  customs,  and  one  of  still  less  significance, 
is  the  occasional  use  of  the  phrase  "  without  defalcation," 
which  is  entirely  out  of  date  except  in  a  few  states  where  the 
law  requires  its  insertion.  It  is  not  necessary  to  specify 
any  particular  place  where  the  note  is  to  be  paid,  although 
this  is  generally  done  by  business  men,  either  their  bank  or 


26  Exchange,  Money,  and  Credit 

their  business  address  being  designated.  The  business  man, 
for  convenience  in  record  keeping,  numbers  his  notes,  as 
he  does  his  checks. 

Unless  so  stated  in  the  promise,  interest  is  not  to  be  paid. 
If  any  other  than  the  legal  rate  is  to  be  paid,  that  rate  must 
be  specified  in  the  note.  If  the  promise  concludes  v/ith  the 
words,  "  with  interest,"  the  legal  rate  of  the  state  in  which 
it  is  drawn  is  understood. 

Usury,  or  the  practice  of  charging  rates  of  interest 
above  the  legal  limit,  is  forbidden  by  statute  law.  A  note 
that  is  non-interest-bearing  during  the  time  agreed  upon 
begins  to  bear  interest  immediately  after  the  due  date,  if  it 
is  not  then  paid. 

A  type  of  promissory  note  that  is  very  common  and  one 
containing  all  the  essentials  and  some  non-essentials  is  the 
one  following : 

Promissory  Note 


^250'^  Des  Moines,   la.,  S^&6-vuaAAf  /,  /<J/8 

<jk.ve&  'yyuyntki^  after  date  I  promise  to  pay  to  the  order  of 
fok'n,  18.  filLL 

S'W^  kv/yiclv&cL  (Iftlf  ^2^^v^r^^^^^r.:^c^<^c-::^^:r:r^'=v^^^r^^^^oco'Dollars 

at       tE^lje  ^econD  j^ational  Banfe  of  SDccf  99ome0 

Value  received 


Kinds   of  Notes.     Promissory  notes  most  common  to 
business  are  distinguishable  in  points  of  (i)  time  when  due, 


Promissory  Notes  27 

(2)  negotiability,  (3)  number  of  signers  or  makers,  (4) 
interest,  and  (5)  security. 

The  notes  thus  far  described  are  called  time  notes,  because 
they  run  for  a  definite  time,  and  meantime  cannot  be  col- 
lected. Another  type  is  the  demand  note,  one  in  which 
the  maker  agrees  to  pay  whenever  payment  is  demanded. 
Instead  of  "  .  .  .  days  after  date,"  the  demand  note 
reads  "On  demand  after  date,"  or  "One  day  after  date 
on  demand." 

Notes  are  either  negotiable  or  non-negotiable.  By  "  ne- 
gotiable "  is  meant  "  transferable  "  ;  that  is,  capable  of 
being  passed  from  the  original  owner  or  payee  to  some  one 
else.  In  order  to  make  the  note  negotiable,  it  is  necessary 
to  make  it  payable  "  to  the  order  of  "  the  payee,  so  that  if 
the  payee  wishes  to  transfer  the  ownership  to  another  per- 
son, he  may  order  it  to  be  paid  to  that  person  by  writing 
such  instruction  on  the  back  of  the  note.  The  note  forms 
thus  far  shown  are  all  negotiable. 

Notes  may  be  signed  by  more  than  one  person  or  com- 
pany as  makers.  When  so  signed,  they  are  called  joint 
notes,  and  each  of  the  signers  is  liable  for  a  proportional 
part  of  the  amount.  Such  a  note  is  introduced  with  the 
words,  "  We  jointly  promise  to  pay."  When  each  of  such 
makers  agrees  to  hold  himself  fully  liable  in  case  the 
others  are  unable  or  unwilling  to  pay,  the  introduction 
should  read,  "  We  jointly  and  severally  promise  to  pay." 
Such  a  note  is  called  a  joint  and  several  note. 

Security.  The  use  of  promissory  notes  depends  not  only 
upon  the  credit  standing  of  the  maker  of  the  note,  but  fre- 
quently upon  the  kind  of  security  the  maker  can  offer,  to 
assure  settlement  of  the  promise.  Security  for  the  pay- 
ment of  notes  is  of  two  kinds  :  personal  and  lien. 


28  Exchange,  Money,  and  Credit 

Personal  security  consists,  first,  in  the  credit  strength  of 
the  maker  himself,  and,  second,  in  the  standing  of  those 
who  supplement  the  credit  of  the  maker  by  indorsement 
or  accommodation,  or  by  guaranty  of  payment  in  some 
other  form.  If  A's  note  is  not  acceptable,  A  may  ask  his 
friend  B,  whose  standing  is  good,  to  write  his  name  across 
the  back  of  the  note,  and  thus  vouch  for  A's  payment  of 
it.  If  B  has  no  business  interest  in  the  transaction,  he  is 
called  an  accommodation  indorser.  Accommodations  of 
this  character  are  hazardous  and  should  be  avoided. 
Many  men  have  become  financially  involved,  to  the  dis- 
tress not  only  of  themselves  but  of  their  famifies  also,  by 
being  called  upon  to  pay  the  notes  of  friends  whose 
credit  they  have  guaranteed  in  a  purely  accommodating 
manner. 

Lien  security  takes  the  form  of  title  to  property  of  some 
kind,  which  is  pledged  for  the  payment  of  the  note.  Lien 
security  is  commonly  stocks,  bonds,  or  mortgages,  which 
must  be  left  with  the  payee  until  the  note  is  paid.  In 
order  to  protect  the  payee  against  depreciation,  the  value 
of  the  securities  must  be  greater  than  the  amount  of  the 
loan. 

Another  but  less  common  kind  of  note  with  lien  security 
is  what  is  called  a  judgment  note.  It  is  the  type  of  prom- 
issory note  exacted  from  a  debtor  who  is  in  the  last 
financial  straits,  whose  individual  credit  is  gone,  who  can- 
not get  personal  security  to  his  notes,  and  who  has  no 
marketable  collateral.  Appended  to  an  ordinary  note 
is  a  confession  of  judgment,  which,  among  other  things, 
binds  the  maker  for  the  cost  of  the  suit,  if  one  arises,  waives 
his  right  to  appeal,  and  also  his  right  to  avail  himself  of  laws 
exempting  property,  real  or  personal,  from  levy  and  sale. 


Promissory  Notes  29 

A  note  of  this  kind  is  so  grinding  in  its  terms,  that  dire 
extremity  is  the  only  justification  for  its  use. 

Judgment  Note 


uTie^  i^&civ  after   date,    for   value  received,    I  promise    to 
pay  to ^aki^  fx&uno-CcU. or  order 

with  interest,  v/ithout  defalcation  or  stay  of  judgnnent.  And  I  do 
hereby  confess  judgment  for  the  above  sum,  with  interest  and  cost  of 
suit,  a  release  of  all  errors  and  waiver  of  all  rights  to  inquisition  and 
appeal,  and  to  the  benefit  of  all  laws  exempting  property,  real  or  per- 
sonal, from  levy  and  sale. 

ofci'yri'ti&t  ^a.'un& 


QUESTIONS   AND    EXERCISES 

1.  What  are  the  essentials  of  a  properly  drawn  promissory 

note? 

2.  Assume  that  John  Browning  borrows  $100  from  you  with 

the  understanding  that  the  amount  is  to  be  paid  back 
when  you  ask  for  it.  Prepare  a  promissory  note  to 
meet  these  circumstances.  Change  it  to  make  it 
payable  in  thirty  da'ys. 

3.  Under  what  circumstances  would  it  be  desirable  to  make 

use  of  a  non-negotiable  note  ? 

4.  Prepare  a  note  in  which  you  and  one  other  member 

of  your  class  become  jointly  and  severally  responsible 
for  a  debt  of  $100  due  your  teacher. 

5.  Read  the  contract  of  a  judgment  note.     Analyze  fls 

clauses  and  explain  why  this  type  of  promise  is  an 
extremely  drastic  one. 


30 


Exchange,  Money,  and  Credit 


VI.    INDORSEMENT   AND   PROTEST 

Indorsement.  It  is  frequently  desirable  for  the  payee  of 
a  note  or  of  a  draft  to  make  it  payable  to  some  one  else. 
This  is  done  by  indorsement. 

In  its  simplest  form,  indorsement  consists  in  the  payee's 
writing  his  name  across  the  back  of  the  left  end  of  the 
instrument.  This  is  known  as  indorsement  in  blank,  and 
appears  as  follows : 


■x/yyve^ 


CLULt 


Another  form,  known  as  indorsement  in  full,  sets  forth 
the  order  of  transfer  in  full.  This  consists  in  the  payee's 
writing  on  the  back  of  the  instrument,  "  Pay  to  the  order 
of  the  (new  payee)  "  and  signature  as  follows: 


S'oAi  to-  tkey  (yul&h  of 


Still  another  form  is  the  restrictive  indorsement,  which 
transfers  rights  in  the  instrument  only  for  specific  purposes ; 
as,  for  example,  transfer  to  a  b2.nk  for  collection.  This 
indorsement  appears  as  follows : 


S^o-v  e^tte(?tu>n,   (yyvtu, 
jiuidi  to-  Ui&  aidsAj  o-i 


Indorsement  and  Protest 


31 


Each  one  of  these  forms  of  indorsement  legally  signifies 
that  the  indorser  vouches  for  the  genuineness  of  the  instru- 
ment which  he  is  transferring,  and  agrees  to  be  held  respon- 
sible for  its  payment  in  case  the  original  maker  or  the  prior 
indorsers  fail  to  pay  it  when  it  becomes  due.  The  laws 
regarding  the  indorsement  of  notes,  drafts,  and  other 
negotiable  instruments  vary  in  different  states.  In  most 
states,  however,  indorsers  can  be  held  responsible  for  the 
payment  of  an  instrument  only  in  case  the  holder  gives 
them  notice  of  non-payment  on  the  part  of  the  maker 
within  twenty-four  hours  after  the  instrument  becomes  due. 
Each  indorser  is  responsible  to  all  indorsers  who  follow 
and  also  to  the  holder  of  the  note  at  its  maturity. 

A  qualified  indorsement  is  effected  by  writing  "With- 
out recourse  "  over  the  indorsement.  By  this  means  the 
holder  of  the  instrument  is  compelled  to  look  to  the 
original  maker  or  other  indorser,  if  any,  for  payment,  and 
not  to  the  person  who  has  indorsed  "without  recourse." 
The  form  of  this  indorsement  is  as  follows : 


joxxy  to  tk&  avcl&v  oi 
cfa/m-'u.e'C   S'oaA^ 


Protest.  As  was  said  above,  in  order  to  hold  indorsers 
responsible  for  the  payment  of  a  negotiable  instrument, 
notice  of  non-payment  must  be  given  to  them.  In  com- 
pliance with  this  requirement,  it  is  customary,  when  a 
promissory  note  or  an  accepted  draft  meets  with  non- 
payment, for  the  holder  to  make  a  formal  protest  to  the 


32  Exchange,  Money,  and  Credit 

maker  and  the  indorsers  of  the  instrument  before  a  notary 
public.  The  notary  pu])lic.  certifies  that  the  note  or  other 
negotiable  instrument  was  presented  for  payment  and  that 
payment  was  refused ;  and  he  thereupon  protests  against 
the  maker  and  indorsers  for  the  amount  of  the  instrument, 
including  damages  and  costs.  The  purpose  of  this  pro- 
test is  to  fix  the  liability  of  the  indorsers,  and  to  alYord 
good  evidence  of  dishonor,  that  is,  of  the  non-payment  of 
the  instrument.  This  notice  of  dishonor  should  be  sent  to 
each  of  the  indorsers  within  twenty-four  hours  after  the 
instrument  has  matured  and  has  been  presented  to  the 
maker  for  payment.  Where  possible,  the  notice  ought  to 
be  served  personally.  If  it  is  not  possible  to  do  this,  the 
notice  should  be  sent  through  the  mails  so  as  to  bear  a 
postmark  date  not  later  than  twenty-four  hours  after  dis- 
honor of  the  instrument.  Notice  of  non-payment  may  be 
served  upon  the  indorsers  by  the  holder  himself,  but  formal 
protest  must  be  made  by  a  notary. 

Form  of  Non-Payment  Notice 


Mr.  Henry  R.  Little 

Philadelphia,  Pa. 

Dear  Sir: 

A  certain  note  nov/  in  ray  posoeosion  drawn 
by  Thomas  Grove  in  your  favor,  for  the  sum  of  Two 
Hundred  Dollars,  payable  in  sixty  days,  from  the 
fifth  of  March  last,  and  by  you  Indorsed  to  me,  was 
duly  presented  by  me  to  Thomas  Grove  this  day  and 
payment  refused.   Please  take  notice  that  I  look  to 
you  for  payment. 

Youre  truly, 
Philadelphia,  Pa.,  April  30,  1918 


Indorsement  and  Protest  33 

Formal  Certificate  of  Protest  by  Notary 


STATE  OF  PENNSYLVANIA^ 


buS'k^   i>c 


/U 


BE  IT  KNOWN,  that  on  this 
^th  cLxu  ol  I'llciu  in  the  year  of  our  Lord  '»^<£'  tAcyu^a.'yicL 
;tt-w-(5-  himcLi&cL  and  etakte&n  \,  ^ci^yh&a^  lAJ-viMyru,  a  Notary 
Public,  duly  commissioned  and  sworn,,  and  residing  in  Doylestown 
in  said  county  and  state,  at  the  request  of  joAiv  CtcLawo,,  went  with  the 
original  note,  which  is  above  attached,  to  the  office  of  J Ivo-'ifva^  ^vo-v-t' 
and  demanded  payment  thereon,  which  was  refused  by  him. 

Whereupon  I,  the  said  Notary,  at  the  request  of  the  aforesaid,  did 
protest,  and,  by  these  presents,  do  solemnly  protest,  as  well  against  the 
maker  of  said  note  and  the  indorsers  thereof,  as  all  others  whom  it  may 
and  doth  concern,  for  exchange,  for  re-exchange,  and  all  costs,  charges, 
damages,  and  interest  already  incurred  by  reason  of  the  non-payment 
of  the  said  note. 

And  1,  the  said  Notary,  do  hereby  certify,  on  the  same  day  and  year 
above  written,  and  within  twenty-four  hours  from  the  time  of  such  pro- 
test, due  notice  of  the  foregoing  was  put  in  the  post  office  at  Doyles- 
town as  follows : 

Notice  for  /"f&niy  /^.   jCCttle-,  <p/tlCcvd&l^^vla'^  <Pcv. 

Notice  for 

Each  of  the  above-named  places  being  the  reputed  residence  of  the 
person  to  whom  this  notice  was  directed. 

In  Testimony  Whereof,  I  have  hereunto  set  my  hand  and  affixed  my 
Official  Seal,  the  day  and  year  above  written. 

Notary  Public 


QUESTIONS   AND    EXERCISES 

Compare  indorsement  in  full  and  in  blank  with  respect 
to  safety  in  use. 

EL.  OF  BUS.  — 3 


34  Exchange,  Money,  and  Credit 

2.  Get  a  number  of  used  checks,  and  study  their  indorse- 

ments. Find  out  who  is  ultimately  responsible  for 
the  amount  represented  by  the  check. 

3.  Give  as  many  reasons  as  possible  for  notifying  indorsers 

at  once  when  a  negotiable  instrument  is  not  met. 

4.  Assume  that  you  hold  a  note  of  John  Danvers  for  $100. 

The  original  payee  was  James  Baynard,  who  indorsed 
the  note  over  to  Isaac  Ridgway,  who  in  turn  by  the 
same  method  passed  it  to  John  Peabody.  When 
presented  for  payment,  the  note  was  protested.  Pre- 
pare a  non-payment  notice,  and  indicate  to  whom  it 
should  be  sent. 

5.  Find  out  the  cost  of  protesting  a  note  before  a  notary 

in  your  neighborhood. 


PART  II 

BANKING  AND  SAVINGS  INSTITUTIONS 

VII.    GENERAL  PRINCIPLES   AND    CLASSIFI- 
CATION 

Development  of  Banking.  Great  changes  have  taken 
place  in  banking  during  the  last  four  centuries.  The 
modern  banker  is,  to  a  large  extent,  a  dealer  in  credit. 
In  ancient  days  he  was  primarily  a  custodian  of  money,  or 
at  most  a  buyer  and  seller  of  foreign  moneys.  Even  as  late 
as  the  Middle  Ages,  the  insecurity  of  property  and  the  risks 
attending  commerce  practically  made  the  business  of  bank- 
ing mere  money  changing.  So  throughout  most  of  its 
early  development,  banking  is  closely  identified  with  the 
activities  of  money-changers  and  of  goldsmiths. 

The  rise  of  modern  banking  dates  from  the  establishment 
at  Venice  of  the  Banco  di  Rialto,  in  1587,  which  received 
deposits  subject  to  call  and  permitted  its  customers  to 
transfer  their  credits  by  order.  Twenty-five  years  later, 
the  Bank  of  Amsterdam  and  the  Bank  of  Hamburg  were 
established,  each  of  which  performed  a  function  similar  to 
that  of  the  Banco  di  Rialto. 

At  first,  during  this  period  of  development,  the  profits  of 
banking  came  altogether  from  commissions  upon  deposits 
and  from  the  exchange  of  domestic  for  foreign  moneys. 
Later  the  growth  of  social  security  and  good  order  made  it 

35 


36  Banking  and  Savings  Institutions 

possible  for  bankers  to  make  use  of  drafts  and  bills  of  ex- 
change and  even  to  lend  the  money  which  had  been  in- 
trusted to  them.  It  was  not  until  the  eighteenth  century 
that  banking  showed  the  two  characteristically  modern 
features :  the  issue  of  notes  not  secured  by  coins  and  the 
grant  of  loans  to  depositors  upon  their  personal  credit. 

During  the  nineteenth  century,  the  vast  extension  and 
complexity  of  industrial,  commercial,  and  financial  relations 
compelled  the  use  of  credit  facilities  never  before  imagined, 
and  brought  wonderful  changes  in  the  manner  of  applying 
them  effectively  and  safely.  Under  the  new  conditions, 
banking  is  important  in  the  everyday  life  of  most  people, 
and  banking  institutions  have  risen  to  a  position  of  economic 
prominence  never  aspired  to  by  the  ancient  banker.  Banks 
to-day  not  only  do  a  large  part  of  the  work  incident  to  the 
settlement  of  credit  transactions,  but  upon  them  also  falls 
the  burden  of  keeping  safely  invested  the  accumulated 
capital  of  the  community.  Because  of  the  variety  of  the 
services  demanded  of  them,  banks  are  compelled  to  specialize 
in  particular  fields  of  the  banking  business. 

Commercial  Banks.  Commercial  banks  provide  espe- 
cially for  the  settlement  of  business  transactions  and  indebt- 
edness by  affording  a  regular  channel  for  the  use  of  checks, 
drafts,  and  other  bills  of  exchange,  for  which  purpose  money 
and  other  funds  are  received  on  deposit.  They  lend  funds 
for  short  periods  of  time  ;  they  provide  for  the  collection  of 
claims  represented  by  promissory  notes  and  commercial 
drafts ;  and  they  take  over  at  interest  rates  immature 
promissory  notes  and  drafts  which  have  been  resorted  to  as 
a  means  of  temporary  settlement  in  business  transactions. 
To  this  class  of  banks  belong  the  national  and  state  banks 
as  well  as  the  banking  departments  of  trust  companies. 


General  Principles  and  Classification  37 

Savings  Banks.  Savings  banks  and  savings  fund  so- 
cieties are  institutions  that  take  on  deposit  small  amounts 
of  savings,  primarily  of  wage  earners,  invest  them  in  a  pre- 
scribed manner,  and,  after  expenses  are  paid,  distribute  the 
net  earnings  to  the  depositors  in  the  form  of  dividends  or 
interest.  As  an  incident  to  the  investment  of  their  funds, 
these  banks  lend  money  under  suitable  conditions  of  security 
for  long  periods  of  time. 

Cooperative  Banks  or  Building  and  Loan  Associations. 
Cooperative  banks  or  building  and  loan  associations, 
although  by  nature  closely  allied  with  the  savings  institu- 
tions, are  distinct  inasmuch  as  such  associations  were 
developed  for  the  purpose  of  advancing  to  the  wage  earner 
funds  for  his  immediate  use  on  the  security  of  his  future 
savings.  Such  associations  are  variously  known  as  co- 
operative banks,  building  and  loan  associations,  savings 
fund  and  loan  associations,  and  cooperative  savings  and 
loan  associations.  All  are  cooperative  associations  designed 
to  furnish  a  safe  means  for  the  accumulation  and  invest- 
ment of  savings,  accompanied  with  an  opportunity  to  secure 
funds  at  reasonable  rates  for  immediate  use,  particularly 
for  the  purpose  of  building  homes  and  improving  real 
property. 

Private  Banks.  Private  banks  are  banking  agencies  that 
give  particular  attention  to  the  collection  and  settlement 
of  debts  arising  in  foreign  trade,  to  the  transfer  of  funds 
from  one  country  to  another,  to  the  lending  of  money,  and  to 
the  investment  of  capital  through  the  marketing,  purchase, 
and  sale  of  stocks  and  bonds  and  other  securities. 

Trust  Companies.  While  trust  companies  maintain  in 
most  instances  flourishing  banking  departments,  they  were 
originally  formed  to  do  what  is  still  their  characteristic 


38  Banking  ana  Savings  Institutions 

service ;  namely,  to  act  in  trust  capacities  as  agents,  trus- 
tees, executors,  administrators,  guardians,  assignees  ;  as  re- 
ceivers for  individuals,  business  associations,  or  corpora- 
tions; as  promoters  or  reorganizers  of  corporations;  as 
sellers  of  stocks,  bonds,  and  other  securities ;  and  as  agents 
for  settlement  of  obligations  maturing  at  a  future  time,  such 
as  premiums  on  insurance,  and  interest  on  bond  and  mort- 
gage issues. 

QUESTIONS  AND   EXERCISES 

1.  What  is  the  origin  of  the  word  "  bank  "? 

2 .  Give  as  many  reasons  as  possible  for  the  present  impor- 

tance of  banking  institutions. 

3.  How  many  different  types  of  banking  institutions  are 

located  in  your  neighborhood,  and  what  specific 
services  does  each  type  perform  ? 

4.  Why  does  the  government  exercise  a  closer  supervision 

over  banking  institutions  than  over  other  kinds  of 
business  enterprises  ? 

5.  What  was  the  number  of  commercial,  savings,  and  other 

banking  institutions  at  the  time  of  the  last  census? 
At  the  time  of  the  preceding  census  ?  How  do  you 
account  for  the  increase  ? 

6.  What  are  some  of  the  causes  for  the  great  growth  of  trust 

companies  ? 

VIII.    COMMERCIAL  BANKS 

Nature  and  Kinds  of  Commercial  Banks.  Commercial 
banks  owe  their  importance  chiefly  to  the  enormous  use 
of  credit  as  the  basis  of  exchange.  They  receive  money 
and  other  funds  on  deposit  and  afford  a  channel  for  the 
use  of  checks,  bank  drafts,  and  other  bills  of  exchange. 


Commercial  Banks  39 

They  perform  an  important  service  also  in  providing  for  the 
collection  of  promissory  notes  and  commercial  drafts,  and  in 
taking  over  and  holding  until  maturity  promissory  notes  and 
time  drafts  offered  in  settlement  of  business  transactions. 
Ij"v  addition,  they  lend  funds  for  short  periods  of  time,  and 
thereby  make  available  over  large  areas  individual  credit 
that  would  otherwise  be  narrowly  limited  to  local  circles. 

To  the  group  of  commercial  banks  belong  the  members 
of  the  National  Banking  System,  the  commercial  banks 
authorized  and  organized  under  state  regulations,  and 
the  commercial  banking  departments  of  trust  companies, 
•which  have  grown  rapidly  during  recent  years.  The  in- 
ternal organization  and  the  methods  of  business  of  state 
banks  and  of  the  banking  departments  of  trust  companies 
differ  but  slightly  from  those  of  national  banks. 

The  National  Banking  and  Federal  Reserve  Systems. 
Previous  to  1863,  the  commercial  banks  of  the  Uniteii 
States  grew  up  as  independent  institutions.  They  wero 
lacking  in  uniformity  and  cooperation,  and  carried  on  their 
work  under  a  great  variety  of  state  regulations  and  super- 
vision. While  several  of  them  were  held  in  great  respect 
for  their  reliability  and  took  every  precaution  to  safeguard 
their  customers,  so  many  others  operated  without  regard 
to  the  welfare  of  those  dependent  upon  them  for  their  bank- 
ing service,  that  the  commercial  banking  facilities  of  the 
whole  country  were  threatened  with  a  breakdown. 

In  order  to  prevent  this,  Congress,  in  1863,  passed  the  Na- 
tional Bank  Act,  under  the  provisions  of  which  a  National 
Banking  System  of  commercial  banks  was  established 
under  Federal  supervision  and  control.  This  secured  a 
large  degree  of  uniformity  and  cooperation  in  the  activ- 
ities and  operations  of  commercial  banks  throughout  the 


40  Banking  and  Savings  Institutions 

country.  Moreover,  through  the  maintenance  of  capital 
and  reserves,  the  Hmitations  upon  loans,  the  liabilities  of 
stockholders  and  directors  for  mismanagement  and  fraud, 
and  the  exercise  of  Federal  supervision,  commercial  bank- 
ing in  the  United  States  was  placed  upon  a  high  plane  of 
usefulness  and  pubUc  confidence. 

However,  owing  to  the  lack  of  adequate  control  over  the 
issue  of  national  bank  notes,  communities  throughout  the 
country  found  themselves  periodically  without  sufficient 
current  funds.  This  situation  was  aggravated  by  the  atti- 
tude of  individual  banks,  which  out  of  fear  held  back  cur- 
rency when  it  should  have  been  most  freely  in  circulation. 

This  condition  of  affairs  led  Congress  in  191 3  to  supple- 
ment the  National  Bank  Act  by  the  Federal  Reserve 
Act.  This  act  estabUshed  a  Federal  Reserve  System  to 
modify  and  assist  the  National  Banking  System  at  points 
where  it  was  deemed  necessary. 

Under  this  system  the  country  is  divided  into  twelve 
financial  districts  known  as  Federal  reserve  districts,  in  each 
of  which  there  is  a  Federal  reserve  bank.  These  banks, 
numbered,  like  the  districts,  in  order  from  i  to  12,  are 
located  in  Boston,  New  York,  Philadelphia,  Cleveland, 
Richmond,  Atlanta,  Chicago,  St.  Louis,  Minneapolis, 
Kansas  City,  Dallas,  and  San  Francisco. 

The  Federal  Reserve  Act  took  away  from  the  national 
banks  the  power  of  issuing  national  bank  notes.  It  gave 
to  the  Federal  Reserve  System  the  right  to  take  over  from 
national  banks  promissory  notes  and  acceptances  held  by 
them  on  discount,  and  to  issue  Federal  reserve  notes  on 
the  security  of  this  commercial  paper,  plus  an  additional 
specified  gold  reserve.  Since  promissory  notes  and  accept- 
ances are  resorted  to  in  times  of  shortage  of  currency,  this 


Commercial  Banks  41 

power  of  the  Federal  reserve  banks  provides  an  automatic 
means  of  adjusting  the  money  supply  of  a  community  to 
its  needs.  In  addition  to  this  important  service,  the 
Federal  reserve  banks  are  authorized  to  carry  deposits  for 
national  and  other  commercial  banks  within  their  districts, 
and  to  act  as  agents  in  settling  claims  among  these  banks. 
This  has  greatly  assisted  the  process  of  commercial  bank 
settlements,  and  promises  to  do  much  to  simpUfy  both 
settlements  and  collections  as  time  goes  on. 

Organization  of  a  Commercial  Bank.  According  to  law, 
a  commercial  bank  must  have  available  capital  before  it 
can  begin  business.  This  is  provided  by  a  body  of  share- 
holders, who  elect  a  board  of  directors  to  manage  the 
affairs  of  the  bank  and  to  choose  the  necessary  officers 
and  subordinate  employees.  The  officers  consist  of  a  presi- 
dent of  the  bank,  sometimes  several  vice  presidents,  and 
a  cashier. 

The  president  is  the  personal  head  of  the  bank,  represents 
the  authority  of  the  board  of  directors,  and  is  responsible 
for  carrying  into  effect  the  policies  of  the  board.  Usually 
this  officer  interviews  prospective  borrowers  and  conducts 
the  important  general  business  relations  of  the  institution. 

The  cashier  directs  and  supervises  the  internal  work  of  the 
bank,  and  is  the  commanding  officer  over  the  tellers,  the 
clerks,  and  the  other  employees.  He  is  responsible  for  the 
funds,  the  securities,  and  all  the  valuables  of  the  institu- 
tion, signs  the  bank  checks,  the  bank  drafts,  and  the 
receipts,  makes  the  bank  indorsements,  and  has  charge  of 
the  correspondence  and  the  accounts.  New  depositors  are 
referred  to  him,  and  they  are  not  admitted  to  the  use  of  the 
facilities  of  the  bank  until  he  assures  himself  that  their 
custom  is  desirable. 


42  Banking  and  Savings  Institutions 

The  receiving  teller  receives  the  deposits  that  come  in 
directly  over  the  counter.  The  paying  teller  has  the  cus 
tody  of  the  cash  funds,  and  therefore  has  charge  of  all  the 
bank's  cash  payments.  The  note  teller  receives  all  pay- 
ments upon  notes  or  promises  to  pay  due  at  the  bank,  and 
looks  after  the  collection  of  many  items  of  deposit. 

The  credit  department  under  a  credit  clerk  ascertains, 
records,  and  keeps  in  form  for  ready  reference  evidence  of 
the  financial  condition  and  the  credit  standing  of  the  cus- 
tomers of  the  bank. 

QUESTIONS   AND   EXERCISES 

1.  How  did  the  National  Bank  Act  of  1863  restore  confi- 

dence in  commercial  banking,  and  in  what  important 
ways  does  it  afford  safety  to  the  depositor? 

2.  On  what  principle  is  the  government  warranted  in  desig- 

nating  important  cities  as  reserve  cities,  and  New 
York,  Chicago,  and  St.  Louis  as  central  reserve  cities? 

3.  What  is  a  business  panic,  and  what  situations  in  the 

community  will  produce  one  ? 

4.  What  is  meant  by  inelastic  currency,  and  how  will  the 

use  of  inelastic  currency  lead  to  panics? 

5.  In  what  respects  does  the  Federal  Reserve  Act  assist 

the  agricultural  production  of  the  country? 

IX.    DEPOSITING    IN    A    COMMERCIAL    BANK 

Opening  a  Commercial  Bank  Account.  When  you  apply 
for  the  privilege  of  using  the  facihties  of  a  commercial  bank, 
you  are  expected  to  be  introduced  and  recommended  by 
some  one  personally  well  known  at  the  bank  or  to  present 
letters  from  such  a  person  vouching  for  your  character 


Depositing  in  a  Commercial  Bank  43 

and  credit  reliability.  A  blank  is  tilled  out  with  your 
name  and  address,  your  business  and  its  location,  and  your 
references. 

If  your  credentials  are  satisfactory,  your  name  is  entered 
in  the  books  of  the  bank  and  your  account  is  opened.  Your 
signature  is  taken  on  one  or  more  books,  or,  nowadays,  on 
cards  that  are  filed.  A  pass  book  is  given  to  you,  in  which 
the  bank  keeps,  for  your  own  guidance,  a  running  account 
of  your  deposits.  Generallythis  book  is  left  with  the  bank 
from  time  to  time,  usually  every  three  months,  to  be  bal- 
anced ;  that  is,  to  have  the  amount  of  payments  that  have 
been  made  on  your  checks  and  other  charges  against  your 
account  deducted  from  your  total  deposits.  In  many 
instances,  however,  banks  issue  formal  monthly  statements 
showing  the  condition  of  the  depositor's  account. 

Items  that  May  Be  Deposited  in  a  Commercial  Bank. 
As  a  result  of  one  of  the  fundamental  principles  of  commer- 
cial banking,  a  commercial  bank  must  hold  itself  in  readi- 
ness to  pay  back  deposits  on  demand.  If  it  finds  itself 
unable  to  do  this,  it  must  close  its  doors,  that  is,  discontinue 
business.  This  necessity  limits  the  kind  of  deposits  that 
may  be  received  from  a  depositor  largely  to  those  which  can 
be  quickly  and  readily  turned  into  funds  that  may  be  used 
to  satisfy  demands.  Items  that  come  within  the  scope  of 
this  deposit  requirement  are  money,  checks  or  drafts  upon 
the  bank  at  which  deposits  are  made,  checks  or  drafts  upon 
other  banks,  sight  drafts  upon  individuals  or  business 
houses,  money  orders,  and  interest  coupons. 

How  to  Deposit.  To  make  a  deposit,  you  are  required 
to  fill  out  a  blank  deposit  slip  with  the  date  and  your  name 
properly  entered  at  the  top,  and  the  character  and  the 
amount  of   your   deposit. 


44  Banking  and  Savings  Institutions 

You  should  list  your  money  separately,  as  gold,  silver, 
or  notes,  and,  in  entering  the  checks,  you  should  write 
against  each  amount  the  name  of  the  bank  drawn  upon, 
if  it  is  a  local  bank,  or  the  name  of  the  town  in  which 
the  bank  is  located,  if  it  is  an  out-of-town  bank.^  List 
other  items  similarly.  Then  add  the  various  amounts, 
and  hand  the  slip  with  your  deposit  and  pass  book  to 
the  receiving  teller.  When  depositing  currency,  arrange 
the  notes  so  that  those  of  the  same  denomination  will 
be  together.  When  depositing  checks  or  drafts,  indorse 
them  by  writing  on  the  back  either  your  name  only,  or  the 
words  "Pay  to  the  order  of  (name  of  bank),"  and  your 
signature. 

When  your  name  is  not  written  correctly  on  the  face 
of  the  check  or  draft,  indorse  the  paper  exactly  as  it  is 
made  payable,  and  then  indorse  it  again  as  you  commonly 
write  your  name. 

Checks  ought  to  be  deposited  or  cashed  promptly. 
Under  decisions  of  the  courts,  you  assume  all  risk  if  you 
delay  longer  than  the  next  succeeding  business  day  col- 
lecting or  depositing  for  collection  the  checks  in  your 
possession.  If  you  hold  a  check  longer  than  forty-eight 
hours,  and  the  bank  on  which  it  is  drawn  fails,  the  one 
who  gave  you  the  check  is  released,  and  you  must  take 
your  chances  for  its  payment  with  the  other  claimants 
against  the  bank. 

*  In  some  localities,  banks  which  are  members  of  the  Federal  Reserve 
System,  are  encouraging  depositors  to  list  check  deposits  under  the  desig- 
nation furnished  Ijy  the  reserve  district  number  of  the  bank  against  which 
the  checks  are  drawn.  For  instance,  a  check  drawn  against  the  Elliott 
National  Bank,  which  is  a  member  of  the  third  district  with  a  membership 
number  of  twelve,  is  listed  on  the  deposit  slip  as  "3-12."  This  has  the 
advantage  of  brevity. 


Depositing   in  a  Commercial  Bank 
Deposit  Slip 


45 


Sperrt)ant0  Bank 

DEPOSITED    BY 

W-Cltt&V   fi-.    (^CHlX&a, 

Lincoln,  Nebraska,  TYlO'ii  16,  1918 


Currency 

Silver 

Gold 

Checks  as  follows  : 

S^lAyoZ  r-Aat' t 

^ke.yn..  o/tat't--- 


36 

6 

/O 

60 

100 

/O 


220 


CENTS 

00 
60 
00 

00 
00 

00 


60 


QUESTIONS   AND   EXERCISES 

What  would  be  the  result  if  a  commercial  bank  allowed 

customers  to  deposit  credit  instruments  not  payable 

on  demand  ? 
Find  out  the  conditions  among  some  of  the  commercial 

banks  of  your  neighborhood  under  which  you  would 

be  allowed  to  open  an  account. 
Get  deposit  slips  from  various  commercial  banks,  and 


46  Banking  and  Savings  Institutions 

note  what  difference  they  show  in  the  way  they 
require  a  customer  to  list  the  items  of  deposit. 

4.  Prepare  a  deposit  sHp  for  the  following  deposit :    $  100 

in  gold  certificates  ;  $  120  in  greenbacks ;  $50  in  gold 
coins;  $27.53  in  other  specie;  a  check  given  you  by 
John  Brown  on  the  First  National  Bank  of  your  city 
for  $125;  another  check  for  $35  issued  to  you  by 
Christian  Lantz  on  the  Merchants  National  Bank  of 
Salem,  Massachusetts ;  a  bank  draft  given  you  by 
Paul  Jones  and  issued  by  the  Continental  National 
Bank  of  Chicago  upon  the  Chemical  National  Bank 
of  New  York. 

5.  What  purpose  does  a  deposit  slip  serve  besides  being  the 

basis  of  giving  you  credit  for  the  amount  of  your 
deposit?  Why  is  the  sHp  of  great  importance  in 
settling  any  difference  between  the  accounts  of  the 
bank  and  the  depositor  ? 

X.    COMMERCIAL   BANK   CHECKS 

The  Commercial  Bank  Check.  As  has  been  pointed  out, 
one  of  the  most  important  services  of  the  commercial  bank 
is  that  of  settling  debts  by  check.  A  check  is  a  written 
order  for  money  drawn  by  one  who  has  funds  in  a  bank 
payable  on  demand.  Banks  provide,  for  the  use  of  cus- 
tomers, blank  checks  so  arranged  in  a  book  that  the  checks 
may  be  torn  out,  leaving  a  stub  upon  which  entries  may  be 
made  showing  in  whose  favor  the  check  is  drawn,  the 
amount,  the  number,  the  date,  and  for  what  purpose  the 
check  is  used.  The  person  who  draws  the  check  is  called 
the  drawer,  or  maker,  and  the  person  to  whom  the  money 
is  to  be  paid  is  called  the  payee. 


Commercial  Baak  Checks  47 

It  is  a  simple  matter  to  fill  out  a  check  properly,  but  there 
are  a  few  essentials  in  regard  to  which  care  must  be  exercised. 

In  the  first  place,  although  the  absence  of  a  date  would 
not  warrant  a  bank  in  refusing  to  cash  a  check,  neverthe- 
less a  check  should  be  properly  dated.  If  a  check  is  post- 
dated, the  bank  is  not  liable  for  payment  before  the  date 
of  the  check.     A  check  dated  on  Sunday  is  valid. 

In  the  second  place,  the  drawer  of  a  check  should 
exercise  great  care  in  so  writing  in  the  amount  as  to  pre- 
vent the  possibility  of  changes  or  additions.  It  is  a  wise 
plan  to  begin  the  writing  at  the  extreme  left  margin  of  the 
check  and  to  draw  a  waved  line  after  the  written  words, 
thus  preventing  any  additional  writing. 

Check 


#^  Scranton,  Pa.,  TfloAf  /6,  /(^f8 

Commercial  i^ational  Banb 

Pay  to  the  order  of (Lt&'?ca,'KcL&v  fi-a^'vyvLU/yyi 


In  the  third  place,  the  signature  should  be  in  the  style 
of  the  one  entered  on  the  book  or  card  of  the  bank  when 
the  account  was  opened,  the  only  one  with  which  the  pay- 
ing teller  is  familiar. 

In  the  fourth  place,  a  check  is  usually  drawn  to  order. 
The  words  "  Pay  to  the  order  of  "  mean  that  the  amount 
of  the  order  is  to  be  paid  to  the  payee  or  to  any  one  to 
whom  the  payee  may  order  the  check  to  be  paid.     If  a 


48 


uanKing  ana  bavings  institutions 


check  is  drawn  payable  "  to  bearer,"  any  person,  the 
bearer,  can  collect  it,  although  the  paying  teller  may  ask 
the  person  cashing  it  to  write  his  name  on  the  back  as  a 
simple  precaution  or  reference.  Banks  make  it  a  rule  not 
to  cash  a  check  that  is  drawn  payable  to  order  unless  the 
person  presenting  it  is  known  at  the  bank  or  unless  he 
satisfies  the  paying  teller  that  he  really  is  the  person  to 

Check  Stub 


Commercial  Jl^ational  5i5anb 

/^ay  16,  fq/8 
#2 

To    (Zte/x,am,d'eA>    /i-a'vn.ilton 
For  (Zniau^t  avaS'&vu  {f-ttt 

Balance  brought  forward- ^/£30 

Amount  deposited <^60 

Total ^/^80 

Amount   of  this  check /<5 

Balan  ce  carried  forward ^/^06 


whom  the  money  is  to  be  paid.  It  should  be  remembered, 
moreover,  that  a  check  drawn  to  order  and  then  indorsed 
in  blank  —  by  the  payee's  writing  of  his  name  on  the  back 
—  is  really  payable  to  bearer,  and  if  the  paying  teller  is 
satisfied  that  the  payee's  signature  is  genuine,  he  will  not 
hesitate  to  cash  it.  If  you  wish  to  have  a  check  cashed 
where  you  are  unknown,  or  if  it  is  not  convenient  for  a 


Commercial  isank  UnecRs  49 

friend  who  has  an  account  at  the  bank  to  go  with  you  for 
the  purpose  of  identifying  you,  it  may  be  necessary  for 
you  to  deposit  it  with  a  bank  until  collection  is  actually 
made. 

Use  of  Commercial  Bank  Checks  for  Special  Purposes. 
If  you  wish  to  draw  money  from  your  account,  the  most 
approved  form  of  check  is  written  "  Pay  to  the  order  of 
Cash."  This  differs  from  a  check  drawn  "  to  the  order  of 
Bearer,"  and  the  paying  teller  will  expect  you  to  present  it 
yourself  or  at  least  through  some  one  well  known  to  him  as 
your  representative.  If  you  write  "Pay  to  the  order  of 
(your  own  name)  "  or  "  Myself,"  you  will  be  required  to 
indorse  your  own  check  before  you  can  get  it  cashed.  If 
you  wish  to  write  a  check  to  withdraw  money  for  the  pay- 
roll, write  "  Pay  to  the  order  of  Wages."  If  you  wish  to 
draw  a  check  to  pay  for  a  bank  draft,  write  "  Pay  to  the 
order  of  Draft  and  Exchange."  In  this  way  a  check  itself 
may  be  made  evidence  of  the  purpose  for  which  the  funds 
were  withdrawn. 

Transfer  of  a  Commercial  Bank  Check  to  Another  Person. 
If  you  wish  to  transfer  a  check  to  some  other  person,  you 
must  indorse  it  either  by  writing  on  the  back,  "  Pay  to  the 
order  of  (name  of  person)  "  and  your  signature,  or  simply 
your  signature.  Remember,  however,  that  the  latter  kind 
of  indorsement  is  attended  with  risk,  since  it  makes  the 
instrument  payable  to  bearer. 

Bank  Checks  Should  Be  Numbered.  Checks  should  be 
numbered  so  that  each  may  l^c  accounted  for.  If  your 
bank  does  not  follow  the  practice  of  issuing  to  you  a  formal 
statement  showing  the  condition  of  your  account  at  the 
end  of  a  certain  period,  your  pass  book  or  bank  book  should 
be  left  at  the  bank,  at  regular  intervals,  so  that  the  book- 

BL.  or  BUS.  —  4 


50  Banking  and  Savings  Institutions 

keepers  may  balance  it.  It  may  happen  that  your  bank 
statement  or  your  bank  book  may  show  a  larger  balance 
than  your  check  book,  indicating  that  there  are  still  checks 
outstanding  that  have  not  been  presented  for  payment. 
Numbering  the  checks  thus  becomes  a  great  convenience 
in  checking  up  the  canceled  checks,  or  vouchers,  and  in 
determining  which  ones  have  not  yet  been  paid. 


QUESTIONS   AND    EXERCISES 

1.  Find  out  what  devices  are  used  to  prevent  "  check 

raising." 

2.  How  should  you  prepare  checks  for  deposit? 

3.  What  would  be  the  effect  if  you  should  indorse  a  check 

'' Pay  to  (payee)  "? 

4.  After  you  have  mailed  a  check  to  the  payee,  suppose 

he  notifies  you  that  it  has  not  reached  him. 
What  should  you  do  ? 

5.  How    can    you    reconcile   a  difference    between    your 

bank  balance  as  shown  by  your  check  book,  and 
the  balance  as  shown  by  the  bank's  monthly  state- 
ment? 


XI.    COMMERCIAL   BANK    CERTIFIED    CHECKS 
AND    OTHER   INSTRUMENTS 

Certified  Checks.  In  settling  many  forms  of  indebted- 
ness, it  may  be  necessary  to  have  your  commercial  bank 
check  certified.  This  is  done  by  the  cashier  or  paying 
teller,  who  writes  or  stamps  across  the-  face  of  the  check 
*'  Certified  "  or  "  Good  when  properly  indorsed,"  and  his 


Certified  Checks  and  Other  Instruments  5 1 

signature.  The  amount  of  the  certified  check  is  imme- 
diately deducted  from  your  account,  and  the  bank  by  thus 
guaranteeing  your  check  becomes  responsible  for  its  pay- 
ment. 

After  having  a  check  certified,  if  you  fail  to  use  it,  you 
ought  to  deposit  the  check  to  your  account;  otherwise 
your  account  will  be  short  the  amount  of  the  order.  This 
form  of  check  is  used  especially  in  transactions  where  the 
ordinary  check  is  regarded  as  not  sufficiently  secure. 

Certified  Bank  Check 


#2  ^--^"■"TTJT''^    Scranton,  Pa.,  U'la.^  /5,  /(Jf8 

lational  li5anft 

ecccmcltv  /'fa^yrvvito-n 

Dollars 
CCxtA/uv  ^icLnt 


Cashier's  Checks.  A  cashier's  check  is  an  order  on  a 
bank  signed  by  the  cashier  of  the  bank.  Usually,  to  obtain 
this  kind  of  check,  as  a  customer  of  a  commercial  bank  you 
would  exchange  your  own  check  for  one  issued  by  the  cashier 
made  payable  either  to  yourself  or  to  such  person  as  you 
may  designate.  If  the  check  is  made  payable  to  yourself, 
you  can  readily  indorse  it  to  some  one  else,  or,  in  the  event 
of  not  using  it,  deposit  it  to  your  account.  This  form,  like 
the  certified  check,  is  employed  when  the  security  af- 
forded by  the  ordinary  check  is  insufficient  to  enable  it  to 
pass  in  business  transactions. 


52  Banking  and  Savings  Institutions 

Cashier's  Check 


#2 

Fort  Worth,  Tex.,   j'W}i& 

ifiwt  jjiational  Bank 

/5,  /f//6 

Pay  to  the  order  of S^OAi^t  ^ton-to^ 

^e-v-&-yitu-lCv-&—~ 

^'^'■-'^~~~~ — '^ '^ 

"^^"Dollars 

//^ 

^anvet  lO-kxX/m.a^'yh 

Cashier 

Certificate  of  Deposit.  As  commercial  banks  receive 
general  deposits  subject  to  the  condition  that  funds  are 
payable  on  demand  by  check  to  the  order  of  the  depositor, 
it  is  not,  in  general,  customary  for  such  banks  to  allow 
interest  on  general  deposit  accounts,  although  there  are 
many  exceptions  to  this  rule.  When  funds  are  deposited, 
however,  which  are  intended  to  remain  for  several  weeks  or 

Certificate  of  Deposit 


Certificate  of  Deposit 

#212 

ffOOCf-^ 

Salem,  Mass.,  //fe-y 

!6,  \9\8 

i?irs;t  jl^ational  Bank 

This  certifies  that-- 
has  deposited  in  this  bank- 

(jA^e,  SkauQ^a/Kcl—-  — 

— Dollars 

payable  to  the  order  of — 

^kcwt&Qy  BattQy 

in  current  funds  on  the  return  of  this  certificate  properly  indorsed,  with 

interest  at  4%  per  annum, 

if  left  six  months. 

RiA^/xavd  BiaOo 

Not  subject  to  check. 

/ 

Cashier 

Certified  Checks  and  Other  Instruments  53 

months,  not  subject  to  check,  most  commercial  banks  issue 
to  the  depositors  a  certificate  of  deposit  which  entitles  the 
holder  to  interest  on  the  amount  of  the  deposit  for  the  time 
that  it  is  left  under  the  certificate.  Such  a  certificate  may 
be  transferred  in  the  same  way  as  a  check,  by  the  process  of 
indorsement ;  or  the  funds  represented  by  the  certificate  may 
be  obtained  by  surrendering  it  to  the  bank  that  issued  it. 

Bank  Drafts.     Nearly  all  banks  keep  funds  on  deposit 
in  other  banks  in  large  commercial  centers,  and  a  bank  draft 

Bank  Draft 


//^^      .  #  1920 

Waterbury,  Conn.,   jivtif  !8,  f  (^ / 8 

^econD  jl^ational  Banh 

Pay  to  the  order  of S'/vvIvM'   ^civt&v 

To  the  ffifjfmical  National  3$aufe  '  Rcdju^lv  ?Ma'itin 

NEW  YORK,  N.  Y.  Cashier 


is  simply  a  bank's  check  drawing  upon  its  deposit  in  some 
other  bank.  Banks  sell  these  drafts  to  their  customers,  and 
speak  of  the  transaction  as  a  sale  of  exchange.  Such  drafts 
are  widely  used  in  making  remittances  from  one  part  of  the 
country  to  another.  Drafts  upon  deposits  in  the  city  of 
New  York  are  especially  used,  and  are  known  as  New  York 
drafts  or  exchange.  Such  drafts  pass  almost  as  cash 
anywhere  within  reasonable  distance  of  the  money  center 
upon  whicli  they  are  drawn.  These  drafts  are  obtained 
from  a  commercial  bank  in  the  same  way  as  cashiers' 
checks,  but  generally  a  small  charge,  known  as  exchange,  is 


54  Banking  and  Savings  Institutions 

made  for  their  use.  This  charge  for  the  use  of  drafts  varies 
with  the  condition  of  the  money  supply  as  affecting  the 
two  banking  points  involved. 

QUESTIONS   AND    EXERCISES 

1.  Give  illustrations  of  various  circumstances  under  which 

a  certified  check  may  be  used  to  great  advantage 
in  making  payment  of  a  debt. 

2.  Explain  the  difference  between  a  cashier's  check  and  a 

bank  draft. 

3.  Under  what  circumstances  is   a  bank  draft  a  highly 

desirable  instrument  in  the  transfer  of  credit? 

4.  What  is  meant  by  domestic  exchange?     What  causes 

lead  to  a  fluctuation  in  domestic  exchange  rates  ? 

5.  Look  up  the  current  domestic  exchange  rate  between 

New  York  and  Chicago. 

Xn.    COMMERCIAL  BANK   COLLECTIONS  AND 
SETTLEMENTS 

Collections  and  Settlements.  It  has  already  been  stated 
that  there  may  be  deposited  to  the  credit  of  your  account  at 
the  bank  not  only  actual  cash  but  also  requests  and  obliga- 
tions to  pay,  such  as  checks,  drafts,  matured  promissory 
notes,  money  orders,  and  similar  items.  These  papers 
represent  merely  claims  of  the  depositor  which  ar^  to  be 
collected  or  settled  by  the  bank.  For  this  work  commercial 
banks  have  established  clearing  houses  and  systems  of  cor- 
respondent banks.  The  clearing  houses  provide  for  the 
settlement  of  claims  growing  out  of  the  banking  business 
of  the  local  community ;  while  correspondent  banks  afford 
a  convenient  means  of  collecting  and  settling  claims  arising 
from  transactions  with  distant  communities. 


Bank  Collections  and  Settlements  55 

Clearing  Houses.  If  all  the  persons  of  a  community 
were  doing  business  through  one  bank,  when  one  individual 
gave  a  check  to  another,  a  settlement  of  the  transfer  would 
involve  merely  the  bookkeeping  process  of  deducting  the 
amount  of  the  check  from  the  account  of  the  one  who  gave 
it  and  adding  it  to  the  account  of  the  one  who  received  and 
deposited  it.  When,  however,  one  person  draws  a  check 
on  his  bank  in  favor  of  another  person,  who  deposits  the 
check  in  another  bank,  the  two  banks  must  come  together 
somewhere  to  make  the  transfer  of  funds  requisite  to  settle 
the  claim  created  by  the  use  of  the  check.  It  is  this  mutual 
meeting  place  that  is  known  as  the  clearing  house.  The 
checks,  drafts,  and  other  items  which  the  banks  present  at 
the  clearing  house  are  called  clearing-house  exchanges,  and 
the  total  exchanges,  the  day's  clearings. 

The  banks  that  bring  claims  amounting  to  less  than  those 
presented  against  them  by  the  other  banks  must  make  the 
difference  good  in  cash  or  its  equivalent  within  a  fixed  time 
upon  the  same  day .  B  y  this  means  settlement  between  banks 
becomes  merely  a  payment  of  balances  through  the  clear- 
ing house,  which  acts  as  the  agent  to  receive  the  amounts 
due  from  the  banks  which  owe,  and  to  pay  the  amounts 
due  to  the  banks  which  have  balances  in  their  favor. 

New  York  Clearing  House.  An  understanding  of  the 
workings  of  clearing  houses  can  be  best  obtained  by  a  brief 
account  of  the  New  York  clearing  house,  which  often  has 
daily  clearings  equal  to  the  sum  of  all  others  in  the  country. 
''  The  banks  represented  send  daily  to  the  clearing  house 
at  least  two  clerks  —  a  delivery  clerk  and  a  settling  clerk. 
At  the  clearing  house,  each  bank  has  a  desk  at  which  the 
settling  clerk  or  clerks  are  seated.  They  bring  to  the 
clearing  house  in  bundles  the  checks,  drafts,  and  other 


56  Banking  and  Savings  Institutions 

obligations  due  them  from  other  banks,  each  bank  being 
represented  by  a  separate  package.  They  bring  also  a  Hsl 
of  the  amounts  due  them  from  each  of  the  banks  in  question. 
Before  clearing  begins,  totals  of  these  lists  are  handed  to 
the  manager.  The  sum  total  represents  the  aggregate 
amount  to  be  settled  for  the  day. 

"  Promptly  at  lo  o'clock  the  delivery  clerks  begin  pass- 
ing from  one  desk  to  another,  delivering  to  each  the 
package  of  claims  of  all  sorts  that  their  banks  have  against 
other  banks.  These  claims  are  accepted  in  bulk,  with- 
out examination  of  the  items.  As  soon  as  all  the 
packages  have  been  delivered  they  are  carried  back  to 
the  banks,  where  an  examination  of  the  items  takes 
place;  and  if  there  are  any  that  are  not  valid,  the  adjust- 
ment takes  place  between  the  bank  which  has ,  received 
them  and  that  which  presented  them,  without  interven- 
tion of  the  clearing  house  or  rectification  of  the  accounts 
drawn  up  there.  When  all  the  packages  have  been  received 
by  the  settling  clerks  at  the  clearing  house,  the  latter  draw 
up  a  statement  of  demands  made  upon  them. 

"As  these  demands  never  balance  the  claims  made  by 
their  banks,  it  is  obvious  that  at  the  close  of  each  day's 
business  some  of  the  banks  will  be  entitled  to  receive 
money  and  others  will  be  obliged  to  make  payments  to  set- 
tle the  accounts.  When  each  clerk  has  made  up  his  ac- 
count, he  forwards  a  statement  of  the  aggregates,  with  the 
amount  of  the  balance  to  be  paid  or  to  be  received.  When 
all  have  forwarded  their  accounts  to  the  manager,  and  the 
accounts  are  proved  by  the  equality  of  the  debit  and  credit 
aggregates  and  balances,  the  manager  certifies  the  amounts 
which  each  bank  owes  to  the  associated  l)anks  or  is  entitled 
to  receive  from  them."  —  New  International  Encyclopedia. 


Bank  Collections  and  Settlements  57 

Correspondent  Collections  and  Settlements.     The  work 

of  collecting  and  settling  the  items  of  deposit  and  collection 
that  arc  claims  against  persons  or  banks  located  at  a  distance 
is  not  so  readily  accomplished,  but  through  the  cooperation 
of  banks  in  the  "  correspondent  bank  system,"  the  task 
is  reduced  to  a  periodic  settlement  of  balances.  By  this 
means  a  claim  presented  to  a  bank  at  one  point  is  charged 
to  the  amount  of  a  correspondent  bank  located  near  the 
point  where  the  claim  is  due,  the  correspondent  bank 
assuming  the  work  of  collecting  the  claim. 

To  illustrate  this  process,  let  us  suppose  that  a  person  liv- 
ing at  Williamsport,  Pennsylvania,  who  deposits  in  the  First 
National  Bank  of  that  town,  sends  his  check  to  another  per- 
son residing  in  Waltham,  Massachusetts,  in  payment  of  a  bill. 
The  latter  will  deposit  the  check  in  the  Waltham  National 
Bank  and  receive  credit  for  the  amount  of  the  check.  The 
Waltham  National  Bank  may  send  the  check  to  the  First 
National  Bank  of  Boston,  which  will  give  the  Waltham  bank 
credit  for  the  amount.  The  First  National  Bank  of  Boston 
will  then  probably  forward  the  claim  to  a  bank  in  Phila- 
delphia, say  the  Girard  National  Bank.  This  bank  will 
give  the  Boston  bank  credit  and  charge  the  amount  against 
the  First  National  Bank  of  Williamsport,  which  has  an 
account  for  such  purposes  with  the  Girard  National  Bank. 
Banks  generally  collect  by  the  most  advantageous  route,  and 
frequently  a  check  or  a  draft  may  pass  through  a  large 
number  of  banks  before  it  is  presented  for  settlement  at 
the  point  where  it  is  due  and  is  charged  against  the  account 
of  the  customer  who  drew  it. 

Collection  Charges.  From  the  above  description,  it  may 
readily  be  seen  that  banks  suffer  inconvenience  and  expense 
by  the  deposit  of  widely  distributed  claims,  as  well  as  a  loss 


58  Banking  and  Savings  Institutions 

of  interest  on  the  deposit  while  the  items  are  in  process  of 
collection.  For  this  reason  banks  frequently  make  a 
collection  charge  of  not  less  than  ten  cents  per  item  or  one 
tenth  of  one  per  cent  upon  the  total  amount  of  the  deposit 
for  collection. 

QUESTIONS   AND   EXERCISES 

1.  In  collecting  a  check  on  a  bank  at  some  distant  point, 

why  is  a  roundabout  route  frequently  chosen? 

2 .  Why  is  the  city  of  New  York  the  greatest  clearing  center 

in  the  country? 

3.  In  what  way  do  Federal  reserve  banks  facilitate  settle- 

ment among  banks  ? 

4.  Find  out  how  your  bank  collects  the  amounts  called  for 

by  the  checks  that  you  deposit. 

5.  What  should  you  do  if  a  check  which  you  deposited  is 

returned  to  you,  marked  "  No  funds  "  ? 

XIII.    COMMERCIAL  BANK   LOANS   AND 
DISCOUNTS 

Borrowing  from  a  Commercial  Bank.  One  of  the  primary 
functions  of  a  commercial  bank  is  the  lending  of  funds  on 
interest  for  short  periods  of  time.  The  length  of  time  for 
which  loans  are  made  varies.  Loans  known  as  call  loans 
are  payable  "  on  demand,"  while  time  loans  are  usually 
for  periods  of  thirty  days,  sixty  days,  or  ninety  days.  Such 
loans  classify  themselves  into  two  groups : 

First,  accommodation  loans  are  loans  made  to  a  customer 
of  the  bank  on  the  strength  of  personal  security.  This 
may  be  represented  merely  by  the  promissory  note  of  the 
customer,  if  his  credit  satisfies  the  bank,  or  by  such  a  note 
supported  by  the  indorsement  of  some  one  approved  by 


Commercial  Bank  Loans  and  Discounts  59 

the  bank,  who  thereby  becomes  responsible  for  its  payment 
in  case  the  maker  fails  to  pay  it.  The  former  is  known  at 
the  bank  as  single-name  paper,  while  the  latter  is  called 
two-name  or  indorsed  paper. 

The  extent  to  which  a  bank  will  -make  loans  upon  the 
security  of  single-name  paper  is  determined  by  the  credit 
responsibility  of  the  borrower  and  by  his  average  monthly 
account  balance.  Usually  a  margin  of  20%  must  be  left 
on  deposit. 

The  form  of  note  which  the  borrower  must  sign  is  gen- 
erally as  follows : 


$600(f-^  ^etvalt,  iTiUk.,  ftiOif  /,  /(^/8 

3^rW\AAf  cldu^  after  date  we  promise  to  pay  to  the  order 

of     iltci^eCv-aO' 

'^vv-&  {^/icii^a'';i.(5^— :^^^-^rt::-:^:r:^^:r^^:^^c^^cco^cr^:r^  Dollars 

^"^  ■3'A,&  TJltA/t-kant^'    Ba.nJO;     heZvo-it,    ?7^vek. 

Value  received 

No.  /8      ^u&  fivty,  31,  ICf/8 
(Residence  or  Place  of  Business) 

/  6  Riv-a^'uL  oftve^&t,  Jbei/hoiZ,  Ifll/^k. 


This  note  must  be  indorsed  by  The  Wilson  Parker 
Company.  It  then  becomes  negotiable,  and  the  bank 
can  dispose  of  it,  if  it  pleases,  to  some  other  bank  or 
person. 

In  the  case  of  two-name  or  indorsed  paper  the  note 
used  is  exactly  like  the  preceding  one  except  that  the 
indorsement  of  the  second  person  (say  James  B.  White)  is 
added  to  that  of  the  maker  of  the  note. 


6o  Banking  and  Savings  Institutions 

If   the  note  on  page  59  were  of  this  type,  the  indorse- 
ment would  be  as  follows  : 


joATve^  IS.    24Mitt& 


^AA 


Second,  coUateralloans  are  loans  made  to  borrowers  who 
deposit,  as  security  for  the  payment  of  the  loan,  stocks, 
bonds,  or  other  evidences  of  debt,  called  collateral,  or 
more  commonly  securities.  Borrowing  from  the  bank 
in  this  way  involves  signing  a  note  which  includes,  in  ad- 
dition to  the  usual  promise  to  pay,  a  supplementary 
agreement  setting  forth  the  right  of  the  bank  to  sell  the 
collateral  on  the  non-performance  of  the  promise  con- 
tained in  the  agreement.  Some  collateral  notes  promise  to 
pay  "  on  demand  "  instead  of  at  a  specified  time. 

The  following  is  a  form  of  the  collateral  note : 


^6000"^  Chicago,  111.,  Tl'la.v^k  I,  /^I8 

On  the  jiv^C  day  of  H'^OAf  next  after  date,  for  VALUE  RECEIVED, 
W-&  promise  to  pay  to  ^1)0  ^taOftfl!*  IBSltk  or  order,  at  said  Bank 

with  interest  at  ^%,  having  deposited  with  said  Bank  as  collateral 
security  for  the  payment  of  this  note, 

(Here  follows  a  list  of  the  securities  and  the  agreement  for  the  sale 
of  the  collateral,  described  above.) 


Tt  is  customary  among  banks,  in  making  loans  that  run 
for  a  definite  time,  to  deduct  the  interest  for  the  period  at 


Commercial  Bank  Loans  and  Discounts  6i 

the  beginning  of  the  period,  or  when  the  loan  is  made.  In 
making  call  loans,  that  is,  those  payable  on  demand,  interest 
is  payable  at  least  every  three  months. 

Discounting  Commercial  Paper,  or  Time  Notes  and 
Drafts.  As  many  transactions  in  the  business  world  are 
settled  for  the  time  being  by  notes  or  by  accepted  drafts, 
commercial  banks  find  a  profitable  field  of  business  in 
buying  such  commercial  paper.  They  remunerate  them- 
selves by  appropriating  the  interest  on  the  amount  of  the 
paper  for  the  period  until  it  is  mature  and  payable.  This 
practice  is  known  as  "  discounting  commercial  paper." 
The  discount  is  simply  the  interest  on  the  note  or  the  draft 
from  the  day  on  which  it  is  dated  to  the  day  on  which  it  is 
payable.  By  this  means  funds  that  would  otherwise  be 
tied  up  until  the  maturity  of  the  notes  or  drafts  are  made 
available  at  once  to  the  holders  of  the  instruments,  with 
no  greater  cost  than  a  sacrifice  of  interest  for  the  period 
during  which  the  instruments  have  yet  to  run. 

QUESTIONS  AND   EXERCISES 

1.  Find  out  upon  what  conditions  a  commercial  bank  in 

your  neighborhood  will  lend  money  to  its  depositors. 

2.  Assume  that  you  wish  to  borrow  $800  on  your  $1000 

Liberty  Bond.     What  steps  must  you  take  ? 

3.  Examine  a  collateral  note  and  find  out  how  it  differs 

from  a  simple  promissory  note. 

4.  If  a  merchant  gives  a  bank  his  90-day  note  for  $6000 

when  the  rate  of  discount  is  5%,  what  amount  will 
the  bank  place  to  his  credit  ? 

5.  Find  out  the  meaning  of  "  single-name  paper  "  and  ''  two- 

name  paper  "  and  under  what  circumstances  each 
may  be  used  as  security  for  a  loan. 


62  Banking  and  Savings  Institutions 

XIV.    SAVINGS   BANKS 

Nature  and  Kinds  of  Savings  Banks.  One  of  the  most 
important  means  of  building  up  individual  credit  is  by 
saving  a  part  of  current  income,  thereby  providing  a  surplus 
from  which  to  meet  obligations  when  due.  A  savings  bank 
is  an  institution  that  receives  on  deposit  small  amounts  of 
savings  and  provides  for  investing  them  in  a  prescribed 
manner.  Some  institutions  take  on  deposit  any  sum  from 
five  cents  to  three  thousand  dollars,  while  others  will  not 
take  less  than  one  dollar  at  a  time  nor  more  than  five 
hundred  dollars  in  total  amount.  At  the  present  time  in 
the  United  States,  these  banks  may  be  classified  in  three 
groups :  (i)  postal  savings  banks ;  (2)  mutual  or  trustee 
savings  banks  and  fund  societies ;  and  (3)  joint  stock  sav- 
ings banks,  including  the  savings  bank  departments  of  trust 
companies,  state  banks,  and  national  banks. 

Postal  Savings  Banks.  In  June,  1910,  Congress  author- 
ized the  Federal  Post  Office  Department  to  conduct  a  sav- 
ings-bank business.  The  act  which  granted  this  authority 
created  a  board  of  trustees  composed  of  the  Postmaster 
General,  the  Secretary  of  the  Treasury,  and  the  Attorney 
General.  An  account  may  be  opened  in  a  postal  savings 
bank  with  one  dollar,  but  total  deposits  are  limited  to  $  1000, 
exclusive  of  accumulated  interest.  Provision  is  made 
for  savings  of  less  than  one  dollar  through  the  sale  of  postal 
savings  stamps  in  the  denomination  of  ten  cents,  which 
are  pasted  to  a  card  until  the  dollar  amount  is  reached. 
As  a  record  of  deposit,  a  certificate  of  deposit  is  issued  to 
cover  the  amount  of  the  deposit.  Under  the  law  creating 
the  postal  savings  banks,  the  rate  of  interest  on  deposits 
is  limited   to   2%,   but  provision  is  made   that  deposits 


Savings  Banks  63 

may  be  exchanged  for  United  States  bonds  in  denomina- 
tions of  $20,  $100,  and  $500,  paying  2^%  interest.  Per- 
sons of  ten  years  and  over  are  allowed  to  open  an  account 
in  their  own  name. 

Mutual  and  Joint  Stock  Savings  Banks.  Mutual  or 
trustee  savings  banks  and  savings  fund  societies  originated 
in  the  efforts  of  public-spirited  men  and  women  to  better 
the  conditions  of  the  working  classes  by  encouraging  them 
to  save,  or  in  the  desire  of  wage  earners  themselves  to 
improve  their  condition  by  saving.  This  was  particularly 
necessary  during  the  latter  part  of  the  eighteenth  century 
and  the  early  part  of  the  nineteenth  century,  when  the  lot  of 
the  wage  earner  was  not  only  a  hard  one  but  one  that  was 
rendered  still  more  acute  by  the  absence  of  any  means  of 
caring  for  his  savings. 

The  joint  stock  banks  developed  during  the  latter  part 
of  the  nineteenth  century  as  enterprises  to  share  in  the 
profits  arising  from  the  investment  of  capital  accumulated 
by  saving.  In  organization  and  practice,  the  mutual  sav- 
ings bank  may  be  said  to  be  typical,  but  in  one  important 
respect  it  differs  from  the  joint  stock  bank ;  that  is,  all 
profits  derived  from  its  operation  go  to  the  advantage  of 
the  depositors,  while  in  the  operation  of  a  joint  stock  sav- 
ings bank,  only  a  fixed  interest  goes  to  the  depositor,  the 
balance  of  profit, if  any,  remaining  with  the  bank. 

Organization  of  Mutual  and  Joint  Stock  Savings  Banks. 
The  control  of  a  mutual  savings  bank  is  generally  placed  in 
the  hands  of  a  board  of  trustees  consisting  of  men  of  high 
character  and  financial  ability,  who  serve  without  pay. 
The  management  of  a  joint  stock  savings  bank  is  vested 
in  a  board  of  directors  selected  by  the  stockholders  fur- 
nishing the  preliminary  capital.     Both  boards  choose  the 


64  Banking  and  Savings  Institutions 

necessary  officers,  who  usually  consist  of  a  president,  a 
treasurer,  and  a  secretary,  with  assistants.  The  presideni 
is  the  cxecuti\e  officer  and  exercises  general  supervision  over 
the  affairs  of  the  institution.  The  secretary  attends  to  the 
correspondence,  acts  as  general  auditor  and  accountant  of 
all  the  departments,  and  keeps  the  minutes  and  records  of 
the  board.  The  treasurer  makes  the  investments,  has  charge 
of  the  cash,  deposits  funds  in  other  banks  and  draws  checks 
upon  them,  collects  interest  on  investments  and  loans,  makes 
payments  for  the  bank,  receives  payments  of  matured  obli- 
gations, receives  applications  for  loans,  and  otherwise  per- 
forms the  duties  of  the  bank's  financial  officer.  The  impor- 
tant subordinate  employees  are  the  receiving  teller,  who 
receives  deposits ;  the  paying  teller,  who  makes  payments 
to  the  depositors;  and  the  bookkeepers,  who  keep  the  ac- 
counts of  the  depositors. 

Opening  a  Savings  Bank  Account.  When  you  open  a 
savings  bank  account,  the  receiving  teller  or  the  clerk  having 
charge  of  new  accounts  will  ask  for  your  name,  residence. 

Card  to  Be  Filled  out  in  Opening  a  Savings  Account 


1, ,  agree  to  conform  to  the  by-laws  and 

regulations  of  the  Cleveland  Saving  Fund  Society  and  any  amendments 
thereto. 

Write  name  in  full 

Residence 

Father's  name 
Occupation Wife's  name 

Husband's  name 
Maiden  name Birthplace - 

Opened Closed 


Savings  Banks  65 

place  of  birth,  the  names  of  your  parents,  and  other  facts 
useful  in  establishing  your  identity,  together  with  a  copy 
of  your  signature.  After  this  preliminary  requirement  i? 
satisfied,  he  will  give  you  a  pass  book  bearing  a  number  as 
well  as  your  name.  When  you  deposit,  the  receiving  teller 
will  ask  you  to  state  the  amount  you  wish  to  deposit  and 
will  direct  you  to  sign  a  slip  on  which  this  amount  is  entered. 
After  taking  your  money,  he  will  enter  the  amount  in  your 
pass  book  on  the  left  side  and  also  upon  the  bank's  deposit 
book.  In  a  large  bank  the  latter  is  done  by  another  clerk. 
Withdrawing  Money  from  a  Savings  Bank.  When  you 
wish  to  withdraw  money  from  your  account  at  a  savings 
bank,  present  your  pass  book  at  the  paying  teller's  window, 

Receipt 


Account  No.  63^5         Date  /%xy  /o,    191^ 
of  notice 
Received,    Cleveland,  Ohio,  TFlanf  26,  1918 

from  the         CletjelauD  ^aiJing  jFunD  ^oriet^ 

of  nioneys  standing  to  credit  of  the  above  account. 


and  name  the  sum  you  desire  to  withdraw.  You  will  usually 
be  asked  to  answer  some  questions  serving  to  identify  you, 
and,  unless  you  are  well  known  to  the  teller,  reference  will 
be  made  to  the  bank's  records  to  prove  your  identity. 
The  amount  requested  will  be  written  upon  a  receipt  form 
which  you  will  be  asked  to  sign,  and  the  date  and  the 
amount  of  your  withdrawal  will  also  be  entered  upon  the 

FL.  OF  BUS.  —  5 


66  Banking  and  Savings  Institutions 

right-hand  page  of  your  pass  book,  which  will  then  be 
returned  to  you.  You  will  thereupon  be  called  by  name 
and  requested  to  state  the  amount  for  which  you  asked. 
Sometimes  the  paying  of  the  money  is  delayed  for  a  stip- 
ulated period,  usually  ten  days  or  two  weeks,  as  a  protection 
to  the  bank  against  unforeseen  and  unexpectedly  large  with- 
drawals, but  usually  payment  is  made  at  the  time  of  the 
request. 

Withdrawing  Money  from  a  Savings  Bank  at  a  Distance. 
For  the  convenience  of  customers  who  may  be  located  too 
far  away  to  appear  personally  at  the  savings  bank  to  with- 
draw the  money  which  they  desire,  many  savings  institu- 
tions make  use  of  a  witnessed  order  similar  to  the  one  shown 
below.  Upon  the  receipt  of  this  properly  filled  out  and 
witnessed,  the  funds  requested  by  the  order  are  sent  to  the 
customer  by  check  or  by  bank  draft. 

Order  to  Be  Signed  in  Withdrawing  Money  at  a 
Distance 


The  deposit  book,  unless  in  the  Society's  keeping,  must  accompany 

this  order 

^6OC0  Account  No.  5d^(^  Jb&e  f6,   \^\S 

Wc^z  CletelanD  gating  i?unD  0ociet^ 

Pay  to S^iMAjJo  S^itvyi&v or  bearer 

of  moneys  standing  to  the  credit  of  above  account. 

Witness...  Q)oj(XhlAJv  (jj^OJV^---  Name  . ^  Jfla.V'if  ■^X/Mf 

Residence.  -  T'llxX'^Xo-OO/,  CIItXo---  Residence..  iTla^vicyyi,  €.ku> 


Savings  Banks  67 

Interest  on  a  Savings  Bank  Account.  The  important 
service  of  a  savings  bank  is  taking  small  savings  on  deposit 
and  investing  them  for  the  benefit  of  the  depositor.  Out  of 
the  income  derived  from  the  investments,  the  trustees  of  a 
mutual  savings  bank  distribute  annually  or  semiannually 
the  profits  in  the  form  of  dividends.  The  annual  dividend 
rate  of  such  banks  varies  generally  from  3%  to  4%.  In 
the  case  of  joint  stock  savings  banks,  the  interest  pro- 
vided is  not  subject  to  much  variation  in  rate.  Interest 
is  allowed  on  a  balance  running  for  a  certain  complete 
period,  as  one  month,  three  months,  or  six  months.  Any 
deposit  made  after  the  beginning  of  the  period,  or  any  with- 
drawal before  its  close,  is  excluded. 

Borrowing  from  a  Savings  Bank.  As  a  great  many 
deposits  are  made  every  day,  savings  institutions  usually 
have  large  amounts  of  funds  to  invest,  and  are  therefore 
wilhng  to  lend  to  borrowers  who  can  furnish  suitable  secur- 
ity or  assurance  that  the  loan  will  be  paid  when  due.  The 
time  of  such  loans  varies,  but  it  is  usually  from  three  to 
five  years ;  and  the  security  required  of  the  borrower  is  a 
mortgage  on  real  estate,  the  value  of  which  must  be  con- 
siderably more  than  the  amount  lent. 

QUESTIONS   AND   EXERCISES 

1.  Why  is  saving  important  not  only  from  the  standpoint 

of  the  individual  but  also  from  the  point  of  view  of 
the  industries  of  the  nation  ? 

2.  Why  does  the  Post  Office  Department  form  a  suitable 

channel  for  conducting  a  savings  bank  business? 

3.  What  steps  must  be  taken  to  become  a  depositor  in  a 

postal  savings  bank? 


68  Banking  and  Savings  Institutions 

4.  Find  out  what  difference  there  is  in  the  organization, 

the  administration,  and  the  purpose  of  a  mutual  and 
of  a  joint  stock  savings  bank. 

5.  What  kinds  of  loans  may  a  savings  bank  make  under 

the  laws  of  vour  state  ? 


XV.    COOPERATIVE   BANKS   AND   BUILDING 
AND    LOAN    ASSOCIATIONS 

Nature  and  Function.  It  has  been  seen  that  the  savings 
bank  affords  the  wage  earner  an  opportunity  to  invest 
savings  safely  until  they  may  be  used  otherwise  to  greater 
advantage.  A  few  decades  after  savings  institutions  orig- 
inated, associations  were  formed  for  the  purpose  of  advanc- 
ing to  the  wage  earner  funds  for  his  immediate  use  on  the 
security  of  his  future  savings.  Such  associations  became 
known  as  cooperative  banks,  building  and  loan  associations, 
mutual  loan  associations,  savings  and  loan  associations, 
savings  fund  and  loan  associations,  and  cooperative  savings 
and  loan  associations.  No  matter  under  what  name  they 
appeared,  these  institutions  were  organized  to  furnish  a  safe 
means  for  the  accumulation  and  the  investment  of  savings 
and  to  afford  opportunities  to  secure  funds  at  reasonable 
rates  for  immediate  use,  particularly  for  the  purchase  or 
improvement  of  houses  or  other  real  property. 

Organization  of  a  Building  and  Loan  Association.  Gen- 
erally speaking,  membership  is  the  only  avenue  by  which  the 
opportunities  afforded  by  the  building  and  loan  association 
may  be  enjoyed,  and  this  rests  upon  the  possession  of  at 
least  one  share  of  stock  of  the  association.  The  member 
agrees  to  pay  into  the  treasury  of  the  association  each 
month  a  certain  sum,  usuallv  one  dollar  for  each  share,  until 


Cooperative  Banks  and  Building  Associations     69 

the  aggregate  amount  paid,  increased  by  the  profits  coming 
from  investment  of  the  funds  paid  in,  equals  the  matured 
value  of  the  share,  which,  in  most  instances,  is  two  hundred 
dollars. 

Prior  to  the  maturing  of  the  share,  it  has  two  values. 
One  is  the  paid-in  value,  or  the  amount  of  actual  pay- 
ments that  have  been  made ;  the  other,  the  holding  or 
book  value,  which  is  the  amount  of  the  payments  made 
plus  the  profits  that  have  accrued.  If  a  shareholder  pays 
one  dollar  each  month,  it  would  require  two  hundred 
months,  or  sixteen  and  two  thirds  years,  to  pay  for  a  share  ; 
but  as  money  paid  in  is  immediately  invested  and  the 
interest  received  is  also  loaned  out,  the  shareholder  will 
have  the  advantage  of  compound  interest,  and  the  hold- 
ing or  book  value  of  his  share  will  amount  to  two 
hundred  dollars  in  a  shorter  time,  or  approximately  in 
twelve  and  a  half  years. 

New  members  are  admitted  at  regular  intervals,  usually 
every  six  months,  and  the  shares  issued  at  each  time  con- 
stitute a  series. 

For  organization  and  administrative  purposes,  the  mem- 
bers, or  shareholders,  elect  a  board  of  directors.  This  board 
selects  a  president,  a  vice  president,  a  treasurer,  a  secretary, 
a  solicitor,  and  various  committees,  including  the  impor- 
tant property  committee,  for  conducting  the  business  of 
the  association.  A  stated  meeting  of  the  association  takes 
place  once  a  month  for  the  receipt  of  dues  on  shares,  for  the 
making  of  loans,  and  for  the  settlement  of  other  business 
pertaining  to  the  association. 

Membership  Advantages  in  Building  and  Loan  Associa- 
tions. If  a  person  is  in  a  position  to  save  ten  dollars  a 
month  out  of  current  earnings,  a  profitable  way  to  invest 


70  Banking  and  Savings  Institutions 

this  amount  will  be  to  take  ten  shares  of  building  and  loan 
stock.  This  would  require  the  payment  of  ten  dollars  a 
month  as  premiums,  or  dues,  on  shares.  These  payments, 
according  to  the  experience  of  carefully  managed  building 
and  loan  associations,  can  be  invested  so  as  to  amount  to 
two  hundred  dollars  a  share  in  about  twelve  and  a  half 
years.  Or,  if  the  person  has  a  suitable  amount  saved  and 
desires  either  to  build  or  to  buy  a  property,  the  amount 
saved  may  be  used  as  part  payment  on  the  property,  and  a 
given  number  of  shares  of  building  and  loan  stock  may  be 
taken  out  to  cover  the  remainder  of  the  value  of  the  prop- 
erty. This  may  then  be  borrowed  in  funds  from  the  build- 
ing and  loan  association  on  the  security  of  a  mortgage 
against  the  property  in  favor  of  the  association.  The 
amount  of  this  mortgage  can  be  satisfied  by  monthly  pay- 
ments of  premiums  and  interest  on  the  mortgage  until  the 
shares  mature,  at  which  time  the  mortgage  is  surrendered 
by  the  building  and  loan  association  in  settlement  of  the 
matured  shares,  and  the  property  holder  receives  a  clear 
title  to  his  property. 

Borrowing  from  a  Building  and  Loan  Association. 
Among  building  and  loan  associations  many-  plans  have 
been  adopted  for  making  loans  to  members.  A  few  lend 
funds  to  members  at  a  fixed  rate  of  interest  in  order  of 
application  or  by  lot.  In  most  cases,  however,  the  loanable 
funds  are  put  up  at  auction  and  sold  to  the  highest  bidder, 
either  upon  the  basis  of  an  advance  of  a  definite  amount  of 
interest  on  the  loan,  or  of  ail  advance  of  premium  payments 
on  the  stock.  In  both  instances,  the  association  obtains  the 
advantage  of  additions  to  its  loanable  capital  in  advance. 
In  general,  while  various  as  to  details,  the  i)lans  for  mak- 
ing loans  are  as  follows : 


Cooperative  Banks  and  Building  Associations     71 

(i)  A  shareholder  may  borrow  not  to  exceed  the  par 
value  of  his  stock  if  he  can  give  satisfactory  security  for 
the  loan. 

(2)  If  there  is  a  limited  amount  of  funds  to  be  loaned 
and  there  are  several  prospective  borrowers,  the  funds 
are  loaned  to  the  one  who  offers  in  addition  to  the  regular 
interest  and  dues  the  highest  bonus  and  premiums. 

(3)  The  borrower  is  required  to  pay  monthly  interest 
on  his  loan  in  addition  to  the  dues  on  his  stock. 

(4)  The  stock  at  maturity  becomes  the  property  of  the 
association  and  extinguishes  the  principal  of  the  loan. 

Security  for  Loans.  From  the  members,  or  shareholders, 
two  classes  of  security  are  acceptable : 

(i)  A  collateral  deposit  of  stock  in  the  association, 
which  usually  entitles  the  borrower  to  a  loan  of  funds 
equal  to  seventy-five  per  cent  of  the  paid-in  value  of  the 
stock. 

(2)  A  mortgage  lien  on  the  property  to  be  improved. 

Discontinuance  of  Membership.  Discontinuance  of 
membership  in  a  building  and  loan  association  may  take 
place  regularly  at  the  end  of  the  period  of  time  necessary  for 
maturing  the  value  of  the  shares  upon  which  the  member- 
ship rests,  or  irregularly  by  premature  withdrawal  from  the 
association.  When  the  periodical  dues  paid,  with  the 
profits  earned,  amount  to  the  ultimate  or  maturing  value 
of  the  shares,  then  the  member,  if  the  shares  have  not  been 
pledged  for  loans,  is  entitled  to  receive  the  value  in  cash. 
If  pledges  for  loans  equal  the  amount  of  the  maturing  value, 
he  is  entitled  to  the  cancellation  of  the  loan  ;  or  if  the  loans 
do  not  equal  the  amount  of  the  maturing  value,  he  is  entitled 
to  receive  in  cash  the  difference  between  the  amount  of  the 
loans  and  the  maturing  value  of  the  shares. 


72 


Banking  and  Savings  Institutions 


Form  of  Note  Used  in  Borrowing  on  Building" 
Loan  Shares 


No. 


Boston,  Mass., 191 


One  day  after  date  I  promise  to  pay  to  the  order  of  the 

Union  15uili)ing  $c  iLoan  ^sisociation 

Dollars 

with  interest  at  six  per  cent  per  annum,  payable  monthly  on  the 
of  each  month  at 

without  defalcation,  for  value  received,  having  assigned  herewith  my 
—  shares  of  the  capital  stock  of  the  said  Association  as  col- 
lateral, as  required  by  the  By-laws  of  said  Association,  which  1  authorize 
the  holder  of  this  note  upon  a  default  in  payment  of  said  debt  or  interest 
thereon,  in  the  manner  required  by  the  By-laws  of  the  said  Association, 
or  upon  non-payment  of  any  of  the  monthly  payments  due  on  said  stock, 
to  sell  either  at  public  or  private  sale  without  demanding  payment  of 
this  note  or  to  cancel  at  its  then  cancellation  value,  without  notice  to 
me,  and  to  apply  the  proceeds,  or  as  much  thereof  as  may  be  necessary, 
to  the  payment  of  this  note  or  the  balance  which  may  then  be  due 
thereon,  with  all  interest,  premiums,  penalties,  and  necessary  expenses 
and  charges,  holding  me  responsible  for  any  deficiency,  or  refunding  to 
me  my  balance.  And  I  further  authorize  the  secretary  of  the  said 
Association  to  transfer  to  the  Association  my  shares  of  stock  of  the 

series,  constituting  him  my  true  and  lawful  attorney  for  these 

purposes. 


Witness, 


Name 

Address- 


Seal 


QUESTIONS   AND    EXERCISES 

I.  Why  is  it  good  business  practice  to  be  a  member  of  a 
building  and  loan  association  as  well  as  a  depositor  in 
both  a  commercial  bank  and  a  savings  bank  ? 


Private  Banks  73 

2 .  Ascertain  the  names  of  several  building  and  loan  associa- 

tions in  your  neighborhood,  and  find  out  under  what 
conditions  they  assist  members  in  buying  houses. 

3.  Get  a  copy  of  the  by-laws  of  a  building  and  loan  associa- 

tion and  see  under  what  conditions  ^the  association  is 
permitted  to  lend  to  its  members  on  the  security  of 
shareholdings. 

4.  Why  is  it  a  disadvantage  to  a  building  and  loan  associa- 

tion to  permit  members  to  withdraw  under  very  easy 
conditions  ? 

5.  Find  out  under  what  circumstances  a  building  and  loan 

membership  is  said  to  "  carry  itself." 

XVI.    PRIVATE   BANKS 

Field  of  Activity.  While  the  private  banker  has  not 
been  superseded  by  the  highly  developed  banking  institu- 
tions of  the  present  day,  he  has  been  compelled  to  devote 
himself  to  special  fields  of  banking.  Private  banking 
houses  of  to-day  give  particular  attention  to  the  collection 
and  settlement  of  claims  arising  in  foreign  trade,  to  the 
lending  of  funds,  to  the  buying  and  selling  of  stocks,  bonds, 
and  other  securities,  and  to  the  transfer  of  funds  from  one 
country  to  another.  The  first  three  fields  need  not  be  con- 
sidered at  length  here.  The  last,  however,  is  of  impor- 
tance because  of  its  close  relation  to  the  needs  of  the  trav- 
eler ;  for  one  of  the  imperative  requisites  in  going  from  one 
country  to  another  is  a  ready  supply  of  funds  of  the  country 
in  which  the  traveler  finds  himself.  Private  banking 
houses  endeavor  to  provide  for  this  need  in  several  ways. 

Circular  Letter  of  Credit.  Among  the  means  provided 
by  private  banking  houses  to  enable  a  traveler  to  secure 


74  Banking  and  Savings  Institutions 

Circular  Letter  of  Credit 


No. 


Addressed  to  the  Correspondents 

of 

i?ifi(be,  Broton,  anD  WitiUi 

New  York,  U.  S.  A., 7^/^^ 

Gentlemen  : 

We  beg  to  introduce  and  commend  to  your  kind  attention 

Mr. ,  to  whom  you 

will  please  furnish  funds  in  sums  as  required  up  to  the  aggregate 
amount  of Pounds  Sterling  against 

sight  drafts  on  Paris  Bank,  Ltd.,  London,  each  draft  to  be  plainly 
marked  as  "drawn    under    F.   B.   and   W.'s   letter   of  credit   number 

We  request  you  to  buy  such  drafts  at  the  rate  at  which  you  purchase 
demand  drafts  on  London,  deducting  your  charges,  if  any,  and  we  en- 
gage that  these  drafts  will  meet  due  honor  in  London  if  negotiated  not 

later  than 1919,  under  the  condition  that 

the  amounts  thus  negotiated  have  been  inscribed  on  the  back  of  this 
letter.  The  letter  itself  must  be  attached  to  the  draft  which  exhausts 
the  credit. 

Please  see  to  it  that  the  drafts  are  signed  in  your  presence,  and  care- 
fully compare  the  signature  with  the  one  below.  We  are,  Gentlemen, 
your  obedient  servants. 


(Holder's  signature) 


funds  in  a  foreign  country  is  the  circular  letter  of  credit. 
This  introduces  the  holder  to  foreign  correspondent  banks 
of  the  banking  house  issuing  the  letter,  certifies  that  he 
is  authorized  to  draw  upon  its  agents  at  specified  points 
to  the  amount  stated  in  the  letter,  and  requests  that  his 
drafts  be  paid  or  honored.     His  signature  is  written  at  the 


Private  Banks 


75 


foot  of  the  letter,  and  sometimes  a  personal  description  is 
given  to  facilitate  identification.  A  list  of  the  agents  of 
the  banking  house  is  contained  on  a  separate  sheet.  When- 
ever a  draft  is  drawn,  it  must  be  signed  in  the  presence  of 
the  representative  of  the  agent  by  whom  it  is  paid.  On  the 
back  of  the  first  sheet  of  the  letter  of  credit  an  indorsement 


Second  Page  of  Letter  of  Credit 


Indorsements  once  made  hereon  of  payments  must  be  allowed  to 
remain  without  alteration  or  erasure  ;  care  should  therefore  be  taken 
to  understand  exactly  about  payments  desired  before  inscribing  below. 

On  the  payment  of  any  sum  exhausting  this  credit,  this  letter  must  be 
surrendered  by  the  holder  and  attached  by  the  banker  negotiating  the 
last  draft  to  the  said  draft. 

Date 

By  whom  paid 

Town 

Am't,  writing 

Am't,  fig. 

5/8/18 

Brown  &  Co. 

London 

Ten  Pounds 

£10 

is  made  showing  the  date,  the  place,  the  amount,  and  the 
name  of  the  agent  making  payment  on  account  of  drafts. 
The  unused  amount  of  such  a  letter  will  be  returned  in 
cash  to  the  holder  by  the  banking  house  that  issued  it. 

International  or  Traveler's  Checks.  Another  instru- 
ment issued  by  private  banking  houses  to  provide  funds  in 
a  foreign  country  is  the  international  or  traveler's  check. 
This  is  a  draft  or  order  drawn  upon  foreign  correspondent 
banks  to  pay  specified  limited  amounts  or  their  equivalent 
in  foreign  currency. 

The  purchaser  must  write  his  name  on  the  face  of  each 
check  and  again  sign  the  order  when  he  has  it  cashed,  thus 
afifording  evidence  of  identity  and  genuineness. 


76  Banking  and  Savings  Institutions 

Form  of  International  or  Traveler's  Check 


$20^  Sold  by.-- - 

No Date 


Good  within  one  year  from  date      

when  countersigned  with  the  op-      —      

posite  signature  (Holder's  signature) 

i?t0br,  IBroton,  anD  ^eU0 

Through  their  correspondents  will  pay  against  this  to  the  order  of 

TWENTY  22 Dollars 

or  equivalent. 


FISKE,    BROWN,    AND   WELLS 


Countersignature  of  holder  which 
must  correspond  with  above. 


QUESTIONS   AND   EXERCISES 

1 .  To  whom  should  you  go  in  your  locality  to  make  financial 

arrangements  for  a  trip  in  a  foreign  country  ? 

2.  Look  up  the  monetary  units  of  the  important  nations  of 

the  world,  and  ascertain  their  values  in  terms  of  the 
United  States  dollar. 

3.  Why  does  the  foreign  exchange  value  of  monetary  units 

vary  from  time  to  time  ? 

4.  What  advantages  and  disadvantages  does  a  letter  of 

credit  show  in  comparison  with  an  international  money 
order  or  traveler's  check  ? 

5.  What  conditions  have  enabled  express  and  telegraph 

companies  to  conduct  a  large  money  order  business? 


PART  III 

INSURANCE 

XVII.   INSURANCE  PRINCIPLES 

Nature  of  Insurance.  Under  prevailing  conditions  ix 
the  world,  life  and  property  are  subject  to  the  risk  of  injury 
and  destruction,  and  in  consequence  even  contract  obliga- 
tions are  exposed  to  uncertainties  of  fulfillment  beyond 
human  anticipation  and  control.  When  such  injury  or 
destruction  occurs,  the  attendant  loss  is  largely  individual 
in  effect.  To  offset  this,  various  forms  of  insurance  have 
been  devised  to  protect  the  individual  against  what  might 
be  overwhelming  loss.  This  is  accomplished  by  a  company 
or  a  group  of  individuals  assuming  the  risks,  distributing 
in  various  ways  the  incidental  losses,  and  by  this  means 
indemnifying  the  sufferers. 

In  practice,  insurance  is  a  contract  by  which  one  party, 
called  the  insurer,  agrees  for  a  stipulated  consideration  or 
payment  to  indemnify  another,  called  the  insured,  in  the 
event  of  loss  due  to  specified  causes.  The  contract  ot 
agreement  is  known  as  the  policy ;  the  consideration  or 
payment,  as  the  premium. 

In  this  broad  meaning  of  the  term  "  insurance,"  we 
may  conceive  contracts  of  indemnity  to  be  made  be-' 
tween   parties,   for  loss   due   to   many   causes.      Indeed, 

77 


y8  Insurance 

such  is  the  condition  and  the  extent  of  the  insurance  busi- 
ness to-day  that  contracts  of  indemnity  exist,  ranging 
in  character  all  the  way  from  the  common  poHcies  on  Hfe 
and  property  to  the  exceptional  and  unique  insurance  of  a 
prima  donna's  voice  or  a  famous  pianist's  fingers.  What- 
ever has  value  to  the  possessor  or  to  another  dependent 
upon  the  possessor  may  become  the  basis  of  an  insurance 
contract,  provided  that  terms  of  consideration  and  indem- 
nity can  be  agreed  upon  by  the  parties  to  the  contract. 

Of  the  many  kinds  of  insurance  in  practice  to-day  — 
life,  fire,  marine,  burglary,  accident,  health,  boiler,  plate- 
glass,  tornado,  credit  —  we  need  concern  ourselves  only 
with  life,  accident,  and  fire  insurance,  as  the  proper  use  of 
these  types  will  sufficiently  safeguard  the  interests  of  most 
individuals. 

Scientific  Basis  of  Insurance.  Insurance  rates  are,  as  a 
rule,  based  on  past  experience  as  to  the  extent  of  losses 
occurring  each  year  in  a  class  of  risk.  If,  for  illustration, 
in  life  insurance,  the  number  of  selected  lives  is  one  thou- 
sand, and  the  average  number  of  deaths  each  year  for  ten 
years  is  fifteen,  each  life  being  insured  for  one  thousand 
dollars,  there  will  be  a  claim  on  the  insurance  company  or 
group  for  fifteen  thousand  dollars  annually.  Theoreti- 
cally, therefore,  the  combined  cost  of  insurance  annually 
for  those  surviving  is  the  amount  w^hich,  if  invested,  w-ill 
produce  the  sum  of  fifteen  thousand  dollars.  To  this 
charge  must  be  added  the  costs  of  conducting  the  business 
and  enough  more  to  provide  for  its  safe  conduct.  The 
primary  idea  of  all  insurance,  therefore,  is  that  relatively 
small  amounts  properly  invested  each  year  by  a  number 
of  persons  will  make  available  relatively  large  amounts, 
falling  due  at  irregular  intervals  with    the   maturing  of 


Insurance  Principles  79 

contracts  through  deaths,  fires,  or  accidents,  as  the  case 
may  be. 

Assessment  and  Level  Premium  Insurance.  There  are 
two  kinds  of  premium  collection :  assessment,  or  natural, 
and  level.  In  effect,  assessment  insurance  is  insurance 
paid  for  by  annual  and,  naturally,  variable  assessments  to 
meet  maturing  policies  and  expenses  each  year.  The  un- 
certainties of  such  insurance  costs  brought  this  plan  into 
such  disfavor  that  few  important  insurance  companies 
continue  to  employ  it  for  premium  collections.  Instead, 
the  level  premium  plan  is  followed,  by  which  a  uniform 
premium  is  charged  annually,  without  regard  to  the  number 
of  policies  that  become  a  claim  against  the  company.  It 
may  happen  under  this  plan  that  in  a  specific  year  the 
premium  may  be  more  than  is  requisite  for  the  payment 
of  actual  losses.  The  excess  is  then  accumulated  in  a 
reserve  or  surplus  which,  with  interest,  is  relied  upon  to 
make  up  deficiencies  of  other  years  when  the  losses  exceed 
expectations. 

Types  of  Insurance  Organizations.  Generally  speaking, 
insurance  organizations  may  be  classified  in  order  of  im- 
portance as  stock  companies,  mutual  companies,  and 
straight  mutual  associations.  From  the  standpoint  of  the 
insured,  however,  there  is  in  practice  little  difference  at  the 
present  time  between  stock  companies  and  mutual  com- 
panies. The  theoretical  difference  between  the  two  is  now 
of  historical  rather  than  practical  significance.  Both  issue 
policies  under  which,  for  a  definite  and  uniform  premium, 
they  assume  specific  risks  and  agree  to  indemnify  sufferers 
for  such  losses  as  occur  under  the  contracts.  Originally, 
in  the  mutual  companies,  the  relation  of  the  insured  to  the 
insurer  was  by  no  means  so  simple.     In  the  early  organiza- 


8o  Insurance 

tions  of  this  type,  tlie  funds  necessary  to  pay  losses  were 
raised  by  assessnienl  after  the  losses  had  occurred.  Under 
such  a  system  neither  profit  nor  loss  could  arise,  and 
neither  reserve  nor  surplus  could  be  established,  as  the 
assessments  were  made  to  cover  only  losses  and  expenses. 

Experience  showed,  however,  that  it  was  extremely 
difficult  to  raise  the  required  amount  in  this  way  when 
losses  were  unusually  heavy.  At  the  present  time,  the 
general  custom  among  all  the  important  mutual  insurance 
companies  is  to  collect  funds  by  premiums  paid  in  advance 
on  the  level  premium  plan.  ^lost  of  the  older  companies 
have  accumulated  large  reserves  or  surpluses  out  of  which 
they  are  able  to  pay  exceptional  losses.  This  to  a  great 
extent  nullifies  one  of  the  original  advantages  held  by 
stock  companies  in  their  possession  of  capital  and  reserves 
as  security  for  policyholders. 

On  the  other  hand,  many  stock  companies  now  compete 
with  mutual  companies  in  offering  to  policyholders  the 
privilege  of  participating  in  the  profits  of  the  company, 
which  originally  belonged  solely  to  the  stockholders  and 
oftentimes  enabled  mutual  companies  to  oflfer  better  rates. 
This  participation  usually  takes  the  form  of  reduced  pre- 
miums, direct  dividends,  or,  in  the  case  of  life  insurance, 
earlier  amortization,  or  maturity,  of  insurance  policies. 

Many  straight  mutual  associations  operating  more  or 
less  on  the  assessment  plan  of  premium'  collection  exist 
in  the  United  States  in  the  form  of  county  and  town  mutual 
companies,  factory  mutual  companies,  and,  with  various 
modifications,  among  fraternal  organizations ;  but,  with  the 
exception  of  the  factory  mutual  companies,  they  present 
limitations  in  management  and  resources  that  seriously 
handicap  their  usefulness.     The  success  of  factory  mutual 


Life  and  Accident  Insurance  8i 

associations  as  contrasted  with  the  others  is  attributed 
chiefly  to  their  pohcy  of  preventing  fire  losses  rather  than 
of  merely  paying  claims. 

QUESTIONS   AND    EXERCISES 

1 .  A  certain  number  of  books  are  lost  by  members  in  every 

class.  How  may  this  loss  be  made  good  without 
imposing  heavily  upon  the  persons  who  lose  the 
books  ? 

2.  As  between  insurance  companies  of  national  scope  and 

those  of  local  activity,  which  is  to  be  preferred  for 
insurance  ? 

3.  In  the  great  fire  disasters  of  San  Francisco  and  Balti- 

more, certain  fire  insurance  companies  were  unable 
to  meet  their  obligations  while  others  met  them 
promptly.  What  scientific  basis  6i  insurance  accounts 
for  this? 

4.  Why  is  a  constant  inflow  of  new  insurance  essential  to 

the  success  of  an  assessment  insurance  enterprise  ? 

5.  What  kind  of  insurance  companies  or  associations  are 

writing  insurance  in  your  community? 

XVIII.    LIFE   AND   ACCIDENT   INSURANCE 

Life  Insurance.  In  a  broad  sense,  life  insurance  is 
divided  into  two  fields  —  ordinary  life  or  standard  insur- 
ance, and  industrial  insurance.  The  distinguishing  features 
of  these  two  kinds  of  Hfe  insurance  are  as  follows : 

Ordinary  life  insurance  began  in  (he  United  States 
early  in  the  nineteenth  century,  and  was  intended  for  the 
head  of  the  family  only,  who  is  insured  for  a  relatively 

EL.  OF  BUS.  —  6 


82  Insurance 

large  amount,  one  thousand  dollars  and  upwards.  Indus- 
trial insurance  in  this  country  is  of  recent  origin  (1875) 
and  is  designed  for  every  member  of  the  family,  who  may 
be  insured  for  small  amounts,  generally  from  ten  dollars 
to  five  hundred  dollars.  The  former  might  therefore  be 
called  class  insurance,  and  the  latter  mass  insurance.  The 
fundamental  idea  of  industrial  insurance  is  to  provide  for 
the  expenses  of  burial  and  the  cost  of  the  last  illness  of 
every  member  of  the  family.  It  is  called  industrial  insur- 
ance because  the  system  is  designed  primarily  to  meet  the 
needs  of  wage  earners  employed  in  the  industries. 

In  ordinary  life  or  standard  insurance,  the  amount  of 
insurance  desired,  say  $5000,  is  determined,  and  the 
premium  or  annual  cost  is  adjusted  to  the  unit  amount. 
In  industrial  insurance  the  amount  of  insurance  is  ad- 
justed to  the  unit .  premium ;  that  is,  the  amount  per 
week  that  it  is  desired  to  pay,  say  $.20,  is  fixed,  and 
this  regulates  the  value  of  the  policy. 

Premiums  in  ordinary  life  or  standard  insurance  are 
payable  annually,  semiannually,  or  quarterly  at  the  office 
of  the  company.  In  industrial  insurance  they  are  collected 
weekly  from  the  house  of  the  insured  by  the  agent  of  the 
company. 

Mortality  Tables.  Out  of  the  actual  experience  of 
American  life  insurance  companies  have  grown  mortality 
tables,  which,  starting  with  one  hundred  thousand  people 
living  at  ten  years  of  age,  show  the  number  dying  each 
year,  and  hence  the  probability  of  death  to  each  person 
each  year  throughout  the  course  of  the  tables,  to  the 
ninety-fifth  year.  From  these  tables  the  cost  of  insurance 
to  any  person  at  any  age  within  the  range  of  the  tables 
can  be  readily  reckoned. 


Lfire  and  Accident  Insurance 


«3 


American  Experience  Table  of  Mortality 

This  is  the  mortality  table  prescribed  by  statute  in  most  of  the  states  as  the  basis 
upon  which  the  reserves  of  life  insurance  companies  shall  be  computed : 


Age 

Number 
Living 

Num- 
ber 

Expec- 
tation 

Age 

Number 
Living 

Num- 
ber 

Expec- 
tation 

Age 

Number 
Living 

Num- 
ber 

Expec- 
tation 

Dying 

of  Life 

Dying 

of  Life 

Dying 

of  Life 

lO 

100,000 

749 

48.72 

39 

78,862 

7S6 

28.90 

68 

43,133 

2,243 

9-47 

II 

99,251 

746 

48.08 

40 

78,106 

76s 

28.18 

69 

40,890 

2,321 

8.97 

12 

98.505 

743 

47-45 

41 

77,341 

774 

27-45 

70 

38,569 

2,391 

8.48 

13 

97,767 

740 

46.80 

42 

76,567 

785 

26.72 

71 

36,178 

2,448 

8.00 

14 

97,022 

737 

46.16 

43 

75,782 

797 

26.00 

72 

33,730 

2,487 

7-SS 

IS 

96,285 

735 

45-50 

44 

74,98s 

812 

25.27 

73 

31,243 

2,505 

7.11 

16 

95,550 

732 

44-85 

45 

74,173 

828 

24-54 

74 

28,738 

2,501 

6.68 

17 

94,818 

729 

44.19 

46 

73,345 

848 

23-81 

75 

26,237 

2,476 

6.27 

18 

94,089 

727 

43-53 

47 

72,497 

870 

23.08 

76 

23,761 

2,431 

5-88 

19 

93,362 

725 

42.87 

48 

71,627 

896 

22.36 

77 

21,330 

2,369 

5-49 

20 

92,637 

723 

42.20 

49 

70,731 

927 

21.63 

78 

18,961 

2,291 

5-11 

21 

91,914 

722 

41-53 

SO 

69,804 

962 

20.91 

79 

16,670 

2,196 

4-74 

22 

91,192 

721 

40-85 

SI 

68,842 

1,001 

20.20 

80 

14,474 

2,091 

4-39 

23 

90,471 

720 

40.17 

52 

67,841 

1,044 

19.49 

81 

12,383 

1,964 

4-oS 

24 

89,751 

719 

39-49 

53, 

66,797 

1,091 

18.79 

82 

10,419 

1,816 

3-71 

25 

89,032 

718 

38.81 

54 

65,706 

1,143 

18.09 

83 

8,603 

1,648 

3-39 

26 

88,314 

718 

38.12 

55 

64,563 

1,199 

17.40 

84 

6,955 

1,470 

3.08 

27 

87,596 

718 

37.43 

S6 

63,364 

1,260 

16.72 

8S 

5,485 

1,292 

2.77 

28 

86,878 

718 

36.73 

57 

62,104 

1,325 

16.05 

86 

4,193 

1,114 

2.47 

29 

86,160 

719 

36.03 

58 

60,779 

1,394 

15-39 

87 

3,079 

933 

2.18 

30 

85,441 

720 

35-33 

59 

59,385 

1,468 

14.74 

88 

2,146 

744 

1. 91 

31 

84,721 

721 

34-63 

60 

57,917 

1.546 

14.10 

89 

1,402 

555 

1.66 

32 

84,000 

723 

33-92 

61 

56,371 

1,628 

13-47 

90 

847 

385 

1.42 

33 

83,277 

726 

33-21 

62 

54,743 

1,713 

12.86 

91 

462 

246 

1. 19 

34 

82,551 

729 

32.50 

63 

53,030 

1,800 

12.26 

92 

216 

137 

.98 

35 

81,822 

732 

31-78 

64 

51,230 

1,889 

11.67 

93 

79 

58 

.80 

36 

81,090 

737 

31-07 

6S 

49,341 

1,980 

11.10 

94 

21 

18 

.64 

37 

80,353 

742 

30.35 

66 

47,361 

2,070 

IO.S4 

95 

3 

3 

.50 

38 

79,611 

749 

29.62 

67 

45,291 

2,158 

10.00 

Preliminary  Steps  in  Insurance.  The  first  essential  is 
to  determine  whether  you  are  insurable;  that  is,  whether 
you  are  in  good  health,  as  only  healthy  persons  can  be 
insured.  Granted  that  your  general  health  is  good,  you 
must  make  sure  that  you  have  no  organic  affection  of 
lungs,  heart,  or  kidneys,  the  organs  principally  tested  by  the 
insurance  companies.     A  wise  precaution  before  submitting 


§4  Insurance 

your  case  to  llie  company's  [physician  is  to  consiill  youi 
lamil\"  (lo(  tor  on  iIksc  points  and  <^v\  his  judgment  upon 
your  insurablf  condition.  It  is  a  detriment  to  Nour  future 
chances  of  insurance  with  other  companies  to  be  refused  by 
the  physician  of  any  one  company.  If  your  own  physician 
finds  your  physical  condition  satisfactory,  the  company's 
physician  will  probably  pass  you. 

Having  convinced  yourself  that  you  are  a  fit  subject  for 
insurance,  you  decide  upon  the  amount  of  insurance  that 
you  desire,  the  kind  of  policy,  and  the  person,  called  the 
beneficiary,  to  whom  this  amount  is  to  be  paid  at  your 
death.  Before  entering  into  an  insurance  contract  with 
any  company,  ask  to  see  a  sample  of  the  policy  you  want, 
and  if  you  are  unable  to  pass  judgment  upon  every  clause 
in  the  policy,  consult  some  one  in  whose  judgment  you  have 
confidence.  A  little  care  at  this  point  may  save  you  much 
disappointment  later  on.  Many  people  are  accepting 
pohcies  which  they  do  not  understand  and  are  carrying 
them  under  a  misapprehension  as  to  their  most  vital 
provisions.  Remember  that  your  contract  with  the  com- 
pany is  the  policy  you  accept,  and  do  not  depend  upon 
the  verbal  understanding  you  have  with  the  agent. 

You  are  now  ready  to  present  yourself  formally  to  the 
company,  and  do  so  in  the  form  of  an  application.  This 
requires  you  to  state  your  age,  your  address,  the  kind  of 
insurance  you  want,  and  the  name  of  the  beneficiary.  It 
also  asks  questions  about  ages  and  causes  of  death  of  your 
parents  and  sometimes  grandparents,  your  occupation,  use 
of  tobacco  and  alcoholic  drinks,  recent  illnesses,  whether 
you  have  had  certain  diseases,  what  other  insurance  you 
carry,  if  any,  whether  you  have  ever  been  refused  by  any 
other  company,  etc.     Your  answers  to  all  these  questions 


Life  and  Accident  Insurance  85 

become  part  of  your  contract  with  the  company,  and  should 
be  carefully  made.  Answers  of  vital  consequence  to  the 
policy,  that  are  later  proved  to  have  been  untrue,  may 
invalidate  the  contract. 

If  the  medical  examination  and  the  application  are 
satisfactory  to  the  company,  the  policy  will  be  prepared 
at  once  and  placed  in  your  hands.  You  are  not  bound 
to  it,  however,  until  you  have  paid  the  first  premium. 

Life  Policies.  Policy  contracts  of  many  kinds  are 
offered  by  all  companies  to-day,  but  those  deserving  the 
consideration  of  the  average  person  fall  into  three  groups 

—  whole-life,  term,  and  endowment. 

The  whole-life  policy  represents  insurance  in  its  first 
and  truest  form.  It  is  one  that  does  not  mature  until  the 
death  of  the  insured.  Premiums  are  based  upon  two 
methods  of  payment :  either  annually  throughout  life,  the 
policy  in  this  case  being  designated  as  ordinary  life ;  or 
for  a  given  period  of  years  only  —  ten,  fifteen,  or  twenty 

—  in  which  case  the  policy  is  called  a  limited  payment  life 
policy.  Ordinary  life  premiums  are  naturally  the  cheaper 
of  the  two,  as  they  are  indeed  the  cheapest  of  all  premiums 
made  for  full  insurance.  This  is  the  type  of  policy  best 
suited  to  heads  of  families  who  wish  to  secure  the  maximum 
amount  of  protection  for  their  dependents  at  minimum  cost. 

Term  insurance,  covering  a  fixed  period,  say  ten  }ears, 
is  resorted  to  in  periods  of  life  when  there  is  a  special  strain 
or  extra  hazard  confronting  the  insured.  This  kind  of 
insurance  expires  at  the  end  of  the  period  stipulated,  with- 
out providing  any  subsequent  return  to  the  one  insured. 

Endowment  insurance  finds  special  favor  with  unmarried 
people  and  with  newly  married  couples.  Its  distinguish- 
ing feature  is  that  the  face  of  the  pohcy  falls  due  at  llie 


86  Insurance 

end  of  the  endowment  period,  generally  twenty  years,  and 
is  then  payable  to  the  insured  himself ;  and  should  he  die 
meantime,  it  is  payable  to  his  beneficiary.  It  thus  com- 
bines the  element  of  investment  with  that  of  insurance. 
The  premium  rate  of  endowment  policies  is  high  because 
every  policy  of  this  kind  becomes  a  claim  upon  the  com- 
pany at  the  end  of  the  definite  endowTnent  term,  if  not 
before.  On  $1000  of  insurance,  if  the  premium  for  ordi- 
nary life  were  $30,  for  an  endowment  policy  at  the  same 
age  it  would  be  $50.  This  type  of  policy  is  to  be 
specially  recommended  to  young  people.  It  is  popular 
also  with  older  people  who  have  no  one  in  particular  de- 
pendent upon  them,  and  who  wish  to  lay  by  a  regular  sum 
which  will  guarantee  the  payment  of  their  living  expenses 
in  case  they  outlive  the  endowment  term,  and  will,  at 
the  same  time,  provide  for  their  funeral  expenses.  It  is 
neither  the  best  kind  of  insurance  nor  the  best  kind  of 
investment,  but  it  fulfills  both  ends  fairly  well. 

Selecting  a  Policy.  The  choice  of  a  policy  is  of  far  more 
consequence  than  the  choice  of  a  company.  All  companies, 
whether  they  are  stock  or  mutual  companies,  will  agree  to 
write  and  to  sell  practically  the  same  kind  of  policies  at 
about  the  same  cost.  The  slight  differences  in  premium 
charges  in  favor  of  one  are  offset  by  higher  dividend  pay- 
ments and  more  liberal  conditions  in  favor  of  the  other. 
Increasingly  stringent  laws  regulate  the  insurance  funds 
wherever  placed,  so  that  on  this  score  the  insured  is  in  safe 
hands  with  any  one  of  the  well-known  companies.  It  should 
be  remembered,  too,  that  of  the  many  kinds  of  insurance  in 
effect,  one  is  just  as  cheap  or  as  dear  as  another.  All 
premiums  are  calculated  upon  the  probable  length  of  life 
as  indicated  by  the  mortality  tables,  or  upon  the  term  of  the 


Life  and  Accident  Insurance  S7 

insurance,  and  a  certain  rate  of  interest  which  the  invest- 
ment of  the  premium  must  earn.  The  basis  of  charge  is 
therefore  identical,  and  a  choice  of  poHcy  is  not  to  be  made 
on  the  ground  of  relative  cheapness,  but  rather  on  the  pur- 
pose the  insurance  is  to  serve  and  on  the  privileges  and 
restrictions  of  the  policy  itself.  Broadly  and  theoretically, 
one  poHcy  is  as  good  as  another. 

After  deciding  that  you  want  a  whole-life,  ordinary  life, 
limited  payment,  term,  or  endowment  policy,  choose  one 
with  these  desirable  features :  (i)  freedom  from  restric- 
tions ;  (2)  convenient  premium  payments ;  (3)  liberal 
terms  and  non-forfeiture ;  (4)  surrender  and  loan  privi- 
leges ;  (5)  exemption  from  claims  of  creditors ;  (6)  privi- 
lege of  changing  beneficiary ;  (7)  participation  in  the 
form  of  annual  dividends ;  and  (8)  liberal  convertibihty 
privileges. 

Annuity.  An  annuity  is  the  annual  income  which  the 
purchaser,  called  the  annuitant,  receives  throughout  life 
in  return  for  a  principal  sum  deposited  with  the  insurance 
company.  The  annuity  principle  is  the  exact  converse  of 
the  insurance  principle.  In  insurance,  as  we  have  seen, 
the  company,  in  consideration  of  a  small  annual  premium 
paid  by  a  man  throughout  life,  agrees  to  pay  a  large  sum 
at  his  death  ;  in  the  annuity,  in  consideration  of  a  large  sum 
paid  to  the  company  at  once,  the  company  agrees  to  pay  a 
small  sum,  called  the  annuity,  each  year  throughout  life. 
This  principal  sum  is  sunk  with  the  company,  and  if  after 
the  first  annuity  is  paid  the  annuitant  should  die,  the  com- 
pany is  entitled  to  retain  the  balance ;  just  as,  on  the  other 
hand,  the  company  stands  ready  to  pay  the  face  of  a  life 
policy  if  death  occurs  unmediately  after  the  first  premium 
has  been  paid. 


88  Insurance 

As  the  amount  of  the  annuity  is  based  on  the  probable 
number  of  payments  to  be  made,  and  as  this  depends  on 
the  probable  length  of  the  amiuitant's  life,  the  mortality 
tables  are  again  necessary  to  the  calculations.  Good  health 
and  a  long  life  are  as  desirable  and  as  vital,  in  this  con- 
tract, to  the  annuitant  as  they  are  in  the  insurance  con- 
tract to  the  company  insuring. 

The  annuity  contract  is  one  to  be  recommended  to  those 
who  wish  to  make  a  profitable  and  safe  investment  of  a 
principal  sum,  either  for  themselves  or  for  others  dependent 
on  them.  The  annuity  is  naturally  considerably  greater 
than  the  income  from  other  investments,  since  it  is  paid 
only  throughout  life  and  at  death  the  principal  becomes  the 
property  of  the  company.  Money  deposited  in  savings  in- 
stitutions or  invested  in  stocks,  bonds,  or  mortgages  yields 
a  smaller  yearly  income;  but  the  principal  is  ultimately 
returned  to  the  investor.  The  rate  of  annuity  income 
depends,  of  course,  upon  the  age  at  which  the  annuity  is 
bought.  At  twenty-five  years  of  age  $1000  would  assure 
an  annuity  of  $50  for  life,  and  at  fifty  years  an  annuity 
of  $70.  The  same  sum  placed  with  a  savings  bank  would 
yield  an  interest  of  from  three  to  four  per  cent,  or  $40  a 
year  at  most. 

Accident  Insurance.  Persons  who  travel  much  or  whose 
work  or  business  tends  to  expose  them  to  injury  or  death  by 
accident,  should  protect  themselves  and  their  families  by 
taking  out  accident  insurance.  So  extensive  is  the  business 
in  this  department  of  insurance  that  many  companies  de- 
vote themselves  entirely  to  the  writing  of  accident  poHcies. 
As  a  j:;()li(  y  of  this  kind  becomes  a  claim  upon  the  compan\' 
only  in  ca.se  of  injury  or  death  due  to  accident,  and  as  an 
accident  is  by  no  means  so  sure  to  befall  a  man  as  is  death. 


Life  and  Accident  Insurance  89 

tlie  cost  is  very  small  as  compared  to  life  insurance.  A 
man  of  thirty  might  pay  an  annual  premium  of  $30 
for  an  ordinary  life  policy  of  $1000,  and  a  premium  of  only 
$5  to  $10  for  an  accident  policy  of  the  same  amount. 
Such  a  policy  would  entitle  his  estate  to  .$  1000  if  he  met 
death  by  accident,  and,  if  he  suffered  injury  from  acci- 
dent, would  pay  him  an  amount  varying  according  to 
the  seriousness  of  the  injury. 

In  view  of  the  relative  cheapness  of  accident  insurance 
and  of  the  increasing  risk  of  accidents  in  our  daily  move- 
ments, an  accident  policy  is  a  precautionary  insurance 
measure  of  which  men  should  avail  themselves  without 
hesitation. 

QUESTIONS   AND    EXERCISES 

1 .  Which  type  of  insurance  —  industrial  or  standard  life  — 

is  most  convenient  for  a  wage  earner,  with  an  income  of 
$15  a  week  and  a  dependent  family  of  wife  and  three 
children  ?     Why  ? 

2.  Are  the  premiums  charged  by  insurance  companies  at 

present  in  strict  accord  with  actual  loss  experience? 
If  not,  why  not  ? 

3.  Get  three  or  four  standard  life  insurance  policies  and 

compare  them,  in  order  to  see  how  they  differ  and 
what  advantages  their  provisions  offer  to  the  insured. 

4.  Why  is  a  limited  payment  insurance  policy  more  suit- 

able for  a  man  elected  or  appointed  to  office  than 
for  a  man  in  an  established  business  or  profession? 
5  A  man  comes  into  possession  of  $10,000  and  decides  to 
invest  it  in  insurance  in  the  interest  of  his  son  and 
daughter.  What  type  of  insurance  is  it  advisable  for 
him  to  take?     Give  reasons. 


90  Insurance 

XIX.   FIRE   INSURANCE 

Nature  of  Fire  Insurance.  Second  only  to  life  insurance 
in  the  extent  of  its  application  to  mankind  generally,  and 
first  in  importance  to  business  enterprise,  is  fire  insurance. 
Fire  insurance  may  be  defined  as  a  contract  to  indemnify 
the  insured  for  actual  destruction  of  certain  specified 
property  by  fire.  Too  much  emphasis  cannot  be  placed 
upon  the  words  "  to  indemnify  the  insured  for  actual 
destruction."  The  one  thing  which  fire  insurance  must 
not  result  in  is  a  profit  to  the  insured.  Therefore,  no 
matter  what  value  is  stated  in  an  ordinary  fire  insurance 
policy,  the  insurer  is  not  liable  for  more  than  the  actual 
value  of  the  property  destroyed. 

As  property  deteriorates  from  daily  use  and  as  a  frequent 
revision  of  values  is  impractical,  the  value  contemplated  is 
that  which  the  property  represents  at  the  time  of  destruc- 
tion. The  principle  of  fire  insurance  is  protection  not  of  the 
property  said  to  be  insured,  but  protection  to  its  owner 
against  loss  by  fire.  To  go  beyond  such  indemnification 
for  actual  loss  would  be  to  admit  the  possibility  of  profit 
and  to  invite  the  intentional  firing  of  properties  for  profit, 
a  contingency  wholly  at  variance  with  the  insurance  idea. 

Economy  of  Fire  Insurance.  Destruction  of  property 
by  fire  is  inevitable.  The  annual  loss  in  the  United  States 
alone  by  this  agency  is  in  the  neighborhood  of  $200,000,000. 
Every  property  owner,  therefore,  should  fortify  himself  in 
some  way  against  loss  due  to  the  possible  destruction  of  his 
property.  He  does  this  by  paying  into  a  common  fund 
managed  by  an  insurance  company  his  pro  rata  share  of 
the  losses  likely  to  occur  to  any  property  insured  by  the 
fund. 


Fire  Insurance  91 

This  pro  rata  pa)anent  is  called  the  fire  insurance 
premium,  and  represents  in  itself  a  relatively  small 
annual  expense  to  each  contributor  to  the  fund,  who 
thus  is  a  party  to  his  own  full  insurance,  as  well  as  to 
that  of  every  other  contributor.  Single-handed,  no  busi- 
ness man  can  afford  to  tie  up  sufficient  of  his  capi- 
tal to  guarantee  himself  full  protection  from  uncer- 
tain losses.  In  the  collective  principle  of  protection, 
however,  there  is  business  economy  in  joining  with  many 
others  to  safeguard  each  against  almost  certain  failure  due 
to  wholesale  destruction  of  property  values  by  fire. 

Fire  Insurance  Policies.  The  type  of  fire  insurance 
poHcy  in  common  use  is  what  is  called  an  open  policy. 
An  open  policy  is  one  which,  while  it  insures  up  to  the  maxi- 
mum of  the  amount  written  in  the  policy,  agrees  to  pay 
only  the  amount  of  loss  actually  incurred.  For  instance,  a 
policy  insures  a  house  for  $5000,  and  a  fire  destroys  that 
house.  If  it  can  be  shown  that  the  house  was  worth 
only  $4000,  the  company  is  liable  for  that  amount  only. 

Because  of  much  dissatisfaction  caused  by  contracts 
of  this  character,  many  states  have  enacted  laws  pro- 
viding that  when  the  insured  building  is  totally  de- 
stroyed by  fire,  the  insurance  company  shall  pay  the 
full  amount  of  the  policy.  Such  a  policy  is  said  to 
be  valued.  The  valued  policies  are  opposed  to  the  in- 
terests both  of  the  insurer  and  the  insured.  In  the  open 
policies  the  owner  of  property  is  generally  allowed  to  name 
his  own  value,  and  the  company  protects  itself  by  limiting 
its  liability  to  actual  loss,  making  a  correspondingly  low 
premium.  In  the  case  of  valued  policies,  if  the  company 
is  to  protect  itself,  it  must  carefully  examine  each  prop- 
erty to  be  insured,  and  the  expense  of  this  examination  is 


92  Insurance 

added  to  the  premium,  which  without  this  is  high  because 
of  the  full  risk  assumed. 

It  is  hardly  necessary  to  add  that  the  poUcy holder  must 
liaAc  an  insurable  interest  in  the  property.  This  means 
that  he  must  have  some  right  to  or  share  in  it,  in  his 
capacity  as  owner,  as  mortgagee,  as  executor  or  adminis- 
trator, or  as  trustee. 

Important  Features  of  Standard  Fire  Insurance  Policies. 
The  standard  policy,  after  mentioning  the  names  of  the 
parties  to  the  contract,  states  the  term  of  insurance  and 
the  amount  of  risk  assumed, ^  and  gives  a  description  of 
the  property.  Then  follows  the  liability  paragraph,  which 
reads  as  follows : 

"  This  company  is  not  liable  beyond  the  actual  value  of 
the  property  at  the  time  any  loss  or  damage  occurs,  and  the 
loss  or  damage  shall  be  ascertained  or  estimated  according 
to  such  actual  cash  value,  with  proper  deduction  for  de- 
preciation, however  caused,  and  shall  in  no  event  exceed 
what  it  w^ould  cost  the  insured  to  repair  or  replace  the  same 
with  material  of  like  kind  and  quality.  Said  ascertain- 
ment or  estimate  shall  be  made  by  the  insured  and  this 
company,  or,  if  they  differ,  then  by  appraisers,  as  herein- 
after provided ;  and  the  amount  of  loss  or  damage  having 
been  thus  determined,  the  sum  for  which  this  company  is 
liable  pursuant  to  this  policy  shall  be  payable  sixty  days 
after  due  notice,  ascertainment,  estimate,  and  satisfactory 
proof  of  the  loss  have  been  received  by  this  company  iji 
accordance  with  the  terms  of  this  policy.  It  shall  be 
optional,  however,  with  this  company  to  take  all  or  any 
part  of  flu'  arlicles  at  such  asccrlaiiicd  or  appraised  value, 
and  also  to  repair,  rebuild, or  replace  the  j)roperty  lost  or 
damaged  with  others  of  like  kind  and  quality  within  a  rea- 


Fire  Insurance  93 

sonable  time  on  giving  notice  within  thirty  days  after  the 
receipt  of  the  proof  herein  required  of  its  intention  to  do  so  ; 
but  there  can  be  no  abandonment  to  this  company  of  the 
property  described." 

The  terms  of  insurance  explicitly  state,  it  should  be 
noticed,  that  the  company  insures  against  all  "  direct  loss 
or  damage  by  fire,"  and  not  against  loss  by  any  other  cause. 
It  should  be  added  that  "'  loss  or  damage  by  fire  "  holds  the 
company  liable  for  damage  to  property  by  water  used  in 
extinguishing  fire  in  adjacent  properties.  Frequently  ju- 
dicial decision  is  necessary  to  determine  what  is  "  loss  or 
damage  by  fire";  but  companies  generally  stand  ready  to 
meet  the  losses  incurred  through  fire  either  directly  within 
the  building  or '  indirectly  from  other  buildings,  if  d'ue 
precaution  has  been  taken  to  protect  exposed  property. 

A  vacant  property,  such  as  a  house  standing  temporarily 
untenanted,  is  likely  to  nullify  the  company's  liability  if  fire 
occurs  during  such  vacancy,  in  cases  where  the  terms  of  the 
policy  expressly  state  that  an  occupied  house  is  insured  as 
described.  Therefore,  if  circumstances  require  temporary 
unoccupancy  of  a  house  or  building  of  any  kind,  notice 
should  be  given  at  once  to  the  insurance  company,  and  a 
special  permit  should  be  obtained.  Such  permits  are  often 
attached  to  the  policies  at  the  time  when  they  are  issued. 
In  some  states,  the  vacating  of  a  building  by  a  policyholder, 
without  the  consent  of  the  company,  works  a  complete 
forfeiture  of  the  policy.  In  other  states,  forfeiture  is 
only  temporary,  or  during  the  time  of  vacancy,  after  which 
the  policy  is  considered  to  revive  itself,  and  if  loss  then 
occurs,  the  company  remains  liable. 

There  are  numerous  other  vital  elements  in  the  standard 
policy  that  should  be  thoroughly  understood  by  the  in- 


94  Insurance 

sured,  but  those  above  mentioned  are  most  essential  to 
common  knowledge.  The  general  admonition  to  read  all 
contracts  to  which  one  is  a  party  apphes  with  special  force 
to  the  fire  insurance  policy. 

Fire  Insurance  Policy  Terms  and  Rates.  Property  insur- 
ance contracts  run  for  short  terms,  generally  one  to  five 
years.  The  old-style  perpetual  policy  issued  on  residences 
has  become  obsolete.  The  changing  conditions  surrounding 
a  building  and  affecting  it  as  an  insurance  risk,  as  well  as 
the  inevitable  deterioration,  make  it  necessary  and  desirable 
to  limit  such  contracts  to  very  brief  terms.  Ease  and 
simplicity  of  renewal  arrangements  contribute  further  to 
the  expediency  of  the  short-term  policy.  Short-term 
insurance  also  means  lower  unit  rates,  as  it  admits  of  more 
frequent  observations  and  examinations  of  the  property, 
and  revision  of  rates  up  or  down  as  hazards  increase  or 
diminish. 

As  compared  with  life  insurance  rates,  the  annual  fire 
insurance  premium  of  $2  or  $5  on  $1000  of  insurance  is 
very  low.  It  must  be  borne  in  mind,  however,  that  every 
life  insurance  policy  becomes  a  claim  upon  the  company 
sometime,  as  every  life  must  end ;  whereas  every  fire  in- 
surance policy  does  not  necessarily  become  such  a  claim, 
because  every  building  will  not  burn,  the  percentage  being 
about  one  to  thirty. 

As  a  closing  thought  on  fire  insurance,  it  should  be  borne 
in  mind  that  since  the  company  is  liable  for  actual  loss 
only,  since  total  destruction  of  property  values  is  exceed- 
ingly rare,  and  since  only  about  one  in  thirty  policies 
becomes  a  claim  upon  the  company,  overvaluation  and 
hence  overinsurance  of  property  are  both  unwise  and  un- 
economicaJ. 


Fire  Insurance  95 

QUESTIONS  AND   EXERCISES 

1.  Explain  why  fire  insurance  rates  for  furniture  in  apart- 

ments are  higher  than  in  individual  houses. 

2.  Make  an  investigation  of  your  neighborhood  to  find  out 

what  variation  there  is  in  the  fire  insurance  rates 
and  what  difference  in  the  rates  is  due  to  variation 
in  the  use  to  which  property  is  put. 

3.  A  house  with  its  contents  is  valued  at  $8000.     What 

amount  of  insurance  is  it  advisable  to  place  upon 
it? 

4.  Get  several  fire  insurance  policies  and  compare  them 

to  find  out  what  differences  they  show. 

5.  In  rural  communities  farmers  have  formed  local  mutual 

fire  insurance  associations.  What  disadvantages  ac- 
company this  type  of  insurance? 


PART  IV 
PROPERTY 

XX.    GENERAL    PRINCIPLES 

Nature  of  Property.  There  are  two  conceptions  of  the 
term  property.  Commonly  it  is  used  to  designate  the 
objects  or  things  that  may  be  owned  ;  abstractly,  and  legally, 
it  is  used  to  designate  the  right,  the  interest,  or  the  estate, 
which  a  person  has  in  land  and  other  things  for  his  exclusixe 
use  and  enjoyment.  This  twofold  meaning  often  leads  to 
confusion  and  therefore  should  be  borne  in  mind.  Further- 
more, property  is  of  two  kinds  —  real  and  personal. 

Real  property  consists  of  land  and  all  things  attached  to 
it  in  a  permanent  way  and  intended  for  use  in  connection 
with  the  land.  Personal  property  includes  all  other  things  ; 
that  is,  those  things  which,  generally  speaking,  are  mov- 
able in  character. 

The  term  estate  is  used  to  designate  the  nature  and  the 
extent  of  interest  one  has  in. either  real  or  personal  property, 
and  gives  rise  to  the  expressions  real  estate  and  personal 
estate. 

In  connection  with  the  practical  use  of  property  there 
are  two  kinds  of  property  rights  —  absolute  and  special. 
The  owner  of  property  is  said  to  have  an  absolute  right 
in  it.  On  the  other  hand,  one  who  rents,  borrows,  or  in 
any  other  way  comes  into  possession  of  property  for  some 

96 


General  Principles  97 

particular  use  has  only  a  special  property  interest  in  it. 
Such  rights  may  be  exercised  to  the  exclusion  of  all  others 
except  those  of  the  owner,  who  must,  however,  respect  the 
special  rights  of  the  other  person  or  party.  In  real  estate, 
the  owner  is  sometimes  called  the  freeholder  and  the  one 
who  rents  the  property  the  leaseholder.  Title  to  property, 
an  important  term  from  the  legal  standpoint,  signifies  a 
combination  of  all  the  elements  that  make  for  a  just  claim 
of  exclusive  ownership. 

Transfer  of  Property.  Transfer  of  the  title  to  property 
may  be  by  contract  of  sale  or  exchange,  by  will  or  by  in- 
testacy procedure,  by  forfeiture,  by  judgment  of  the  court, 
or  by  bankruptcy.  Use  of  property  may  be  allowed  by 
lease,  or  in  trust  by  bailment.  At  the  basis  of  the  contract 
of  sale  and  of  the  lease  are  the  principles  of  contract  law. 
Although  it  is  not  possible  to  treat  these  principles  tech- 
nically or  exhaustively,  the  essentials  of  the  typical  con- 
tract obligations  common  to  most  people  should  be 
studied. 

Meaning  and  Essentials  of  Contracts.  A  contract  is  an 
agreement  enforcible  by  law.  All  agreements  are  not 
necessarily  contracts ;  but  every  contract  must  represent 
an  agreement.  In  order  that  an  agreement  may  be  thus 
enforcible,  the  law  requires  the  fulfillment  of  certain  con- 
ditions, the  principal  of  which  are  the  following : 

(i)  The  agreement  must  be  made  by  persons  who  are 
legally  competent  to  make  a  contract.  By  this  is  meant 
all  citizens  of  sound  mind  who  have  reached  the  legal  age 
of  twenty-one  years.  Some  states  include  girls  of  eighteen 
years,  or  even  younger,  if  married.  -  Therefore  so-called 
infants,  or  those  under  age,  cannot  l3e  bound  by  contract ; 
neither  can  convicted  criminals  be  thus  bound — for  they 

EL,  OF  BUS.  —  7 


98  Property- 

are  deprived  of  the  right  to  perform  civil  duties  in  the  eyes 
of  the  law ;  nor  lunatics  nor  drunkards,  provided  that  their 
disabilities  are  established  to  be  of  such  degree  that  they 
permanently  unfit  the  persons  for  rational  actions. 

(2)  There  must  be  mutual  consent  to  the  agreement. 
If  one  or  the  other  person  is  led  into  the  agreement  through 
misrepresentation,  mistake,  fraud,  undue  influence,  or 
duress,  he  cannot  be  held  responsible.  By  duress  is  meant 
the  securing  of  the  signature  to  an  agreement  by  physical 
force  or  by  threats  of  bodily  injury. 

(3)  There  must  be  a  consideration-underlying  the  agree- 
ment. For  instance,  A  may  promise  to  give  B  an  automo- 
bile; but  if  it  is  a  mere  gift  promise,  without  intention 
that  B  shall  exchange  money  or  value  in  any  other  form  with 
A,  the  agreement  is  not  binding  upon  A.  As  soon  as  B 
agrees  to  give  in  exchange  one  hundred  dollars,  which  is  a 
consideration,  a  valid  contract  is  made. 

(4)  The  act  of  agreement  must  be  within  the  law  itself. 
Two  men  might  prepare  an  elaborate  contract  form  setting 
out  conditions  on  which  they  would  rob  a  house  and  divide 
the  spoils;  but  their  agreement  would  not  be  binding,  be- 
cause burglary  is  illegal. 

Kinds  of  Contracts.  Contracts  may  be  classified  as  (i) 
written,  (2)  verbal,  and  (3)  implied.  Written  contracts 
are  of  two  kinds  :   (a)  ordinary,  and  (b)  under  seal. 

The  best  and  most  binding  contracts  are  the  written  con- 
tracts. Little  is  left  to  uncertainty  or  dispute  as  to  the 
conditions  of  the  agreement  if  they  are  reduced  to  writing 
and  if  the  names  of  the  parties  to  the  agreement  are 
attached. 

An  ordinary  or  simple  contract  is  one  thus  committed 
to  writing.     The  law  prescribes  no  particular  form,  sim- 


General  Principles  99 

ply  requiring  that  the  agreement  entered  into  be  clearly 
stated  and  be  in  conformance  with  the  four  essentials 
noted  above.  Any  such  simple  contract  may  be  converted 
into  a  contract  under  seal  by  a  slight  change  in  the  phrase- 
ology of  the  closing  paragraph  and  by  the  additions  of  the 
seals  to  the  names  of  the  contracting  parties.  A  seal  may 
be  represented  by  any  of  several  legal  devices  or  signs, 
such  as  a  paster,  the  word  "  seal  "  or  the  letters  "  L.  S."  for 
locus  sigilli,  "  the  place  of  the  seal."  The  laws  of  the  states 
require  that  certain  kinds  of  contracts  be  in  writing  and 
that  certain  of  them  be  under  seal;  but  as  these  laws  are 
not  uniform,  it  is  necessary  to  consult  the  statutes  of  each 
state  in  order  to  avoid  the  drawing  of  an  illegal  agreement. 

Generally  speaking,  the  following  contracts  must  be  in 
writing : 

(i)  The  promise  of  an  executor  or  an  administrator  to 
pay  out  of  his  own  estate  that  which  is  due  from  the 
estate  he  is  administering. 

(2)  The  promise  to  answer  for  the  debt  or  default  of 
another;  that  is,  to  be  surety  that  another  will  pay  his 
debts  or  discharge  any  other  of  his  legal  obligations. 

(3)  The  promise  to  do  anything,  in  consideration  of 
marriage,  as  for  example,  to  transfer  property. 

(4)  Any  contract  for  sale  of  lands,  or  any  interest  in  or 
concerning  lands  (though  in  the  United  States  sometimes 
leases  for  less  than  one  year  are  excepted). 

(5)  Any  contract  which  by  its  terms  is  not  to  be  per- 
formed within  the  space  of  one  year  from  the  time  of  mak- 
ing it ;  but  if  it  may  be  fully  performed  within  one  year 
it  is  not  required  to  be  in  writing. 

The  law  holds  equally  binding  many  kinds  of  agreements 
made  by  word  of  mouth.     If  the  manager  of  a  store  engages 


100  Property 

a  clerk,  verbally,  at  a  salary  of  $60  a  month  for  one  year, 
such  agreement  is  enforcible  by  law.  Important  engage- 
ments of  this  kind  should  not  be  left,  however,  to  verbal 
understanding,  as  memories  are  defective  and  constructions 
to  be  placed  upon  such  understandings  differ  greatly. 

Implied  contracts  are  unconsciously  entered  into  every 
day,  but  are  none  the  less  binding  because  of  the  lack  of  ex- 
pressed agreement.  For  example,  a  taxicab  rushing  down  the 
street  is  hailed  by  Mr.  Smith,  who  jumps  in  and  instructs  the 
chauffeur  as  to  his  destination.  No  thought  of  contract  en- 
ters Mr.  Smith's  mind  ;  there  has  been  no  bargain  with  the 
chauffeur  as  to  what  the  service  is  to  cost;  yet  Mr.  Smith, 
by  his  act  of  taking  possession  of  the  public  conveyance,  puts 
into  effect  a  contract  to  which  the  law  holds  him  bound. 
He  cannot  legally  escape  paying  the  regular  charge  for  such 
service.  The  same  is  true  of  a  man  who  enters  a  railway 
train  without  a  ticket ;  he  binds  himself  by  implied  contract 
to  pay  the  railway's  rate  of  fare  for  the  distance  he  travels. 

QUESTIONS   AND   EXERCISES 

1.  By  what  ways  may  one  come  into  control  of  real  and 

personal  property  ? 

2.  Explain  how  property  may  be  lost   by  forfeiture,  by 

judgment  of  the  court,  and  by  bankruptcy. 

3.  Look  up  several  special  types  of  agreements  against 

public  policy  in  your  locality,  and  therefore  not  subject 
to  contract. 

4.  Give  reasons  why  it  is  important  that  all  agreements 

pertaining  to  real  property  should  be  put  in  writing. 

5.  What  is  a  franchise,  and  how  does  it  differ  from  other 

personal  property? 


Leases  loi 


XXI.   LEASES 


Leases.  Of  the  four  most  common  instruments  growing 
out  of  transactions  in  real  estate  —  the  lease,  the  bill  of 
sale,  the  deed,  and  the  mortgage  —  the  lease  touches  the 
lives  of  the  greatest  number  of  people  ;  it  should  therefore 
be  clearly  understood  in  its  main  provisions.  The  lease 
is  a  written  rent  contract  permitting  one  person,  called  the 
tenant  or  lessee,  to  use  for  a  given  period  of  time  the 
property  of  another  person,  called  the  landlord  or  lessor. 

Vital  Provisions  of  Leases.  Perhaps  no  document  more 
frequently  passes  hands  than  the  common  house  lease. 
Satisfaction  in  the  operation  of  such  leases  can  only  be  had 
after  a  thorough  understanding  between  the  landlord  and 
the  tenant.  For  instance,  the  tenant  should  know  beyond 
question  whether  he  or  the  landlord  is  to  make  general 
repairs  other  than  those  following  damage  by  the  elements. 
Unless  agreement  upon  this  point  is  expressed  in  the 
lease,  the  tenant  in  most  states  must  keep  up  the  property 
so  far  as  wear  and  tear  are  incident  to  his  occupancy, 
and  must  surrender  the  premises  in  as  good  condition  as 
when  received. 

A  second  subject  of  consideration  is  the  lessee's  right  to 
sublet  the  property  for  an  unexpired  portion  of  the  term. 
On  this  point  it  may  be  borne  in  mind  that  standard  leases 
do  not  give  the  tenant  this  right  without  the  consent  of  the 
landlord.  A  third  point  to  be  emphasized  is  that  rented 
buildings  cannot  be  used  legally  for  any  other  purpose  than 
that  specified  in  the  contract.  A  building  leased  for  resi- 
dence purposes  could  not  be  converted  into  a  store,  or  into  a 
hotel,  for  instance,  without  the  consent  of  the  owner,  which 
should  be  given  in  writing. 


I02  Property 

Lease 


LEASE  MADE  AND  EXECUTED  between  .^i^:)!^  S'o-w-e/ia., 
of  €v-a/ytQA>-Cttt ,  cJrvct.,  of  the  first  part,  and  ^alwi  /r&n'vu,  of 
the  (u^m.e'  e^Ctu,  of  the  second  part,  this  ivioZ  day  of  CZtcau^t  in 
the  year  c>'yi&  Uic>UA,<hncC  ■yivn&  fvu/yicCv&cC  OAvci  evan,t&e/yi. 

In  consideration  of  the  rent  and  covenants  hereinafter  expressed, 
the  said  party  of  the  first  part  has  demised  and  leased,  and  does  hereby 
demise  and  lease  to  the  said  party  of  the  second  part,  the  following 
premises,  viz. 

(Then  follows  description  and  location  of  property  and  terms  of 
lease) 

And  the  said  party  of  the  second  part  covenants  that  he  will  pay 
to  the  party  of  the  first  part  for  the  yse  of  the  said  premises  the  monthly 

rent  of to  be  paid  in  advance.     Provided  that  if  said  party 

of  the  second  part  shall  fail  to  pay  said  rent,  or  any  part  thereof,  when 
it  becomes  due,  it  is  agreed  that  said  party  of  the  first  part  may  sue  for 
the  same  or  reenter  said  premises,  or  resort  to  any  legal  remedy.  The 
party  of  the  second  part  covenants  that  at  the  expiration  of  said  term 
he  will  surrender  up  said  premises  to  the  party  of  the  first  part  in  as 
good  condition  as  now,  necessary  wear  and  damage  by  the  elements 
excepted. 


Terms  of  Leases.  Residence  leases  are  usually  written 
for  from  one  to  three  years,  with  payments  monthly  in 
advance,  and  a  notice  of  one  to  three  months  by  either 
party  if  occupancy  is  to  terminate  at  the  end  of  the  lease 
period.  Otherwise  the  lease  automatically  extends  itself 
from  year  to  year,  and  occupancy  may  continue  without  the 


Leases  103 

formality  of  a  new  contract  between  the  parties.  Some 
residence  leases  are  of  the  monthly  type,  in  which  case  the 
property  may  be  vacated  at  the  end  of  any  month,  after 
notice  of  from  two  to  four  weeks  has  been  given.  Each 
party  to  a  lease,  as  to  all  other  property  contracts,  should 
possess  a  copy, 

QUESTIONS   AND   EXERCISES 

1.  Upon  what  principle  of  common  law  is  the  lease  con- 

tract based? 

2.  Assume  that  you  own  a  store  property  in  a  good  business 

block.     Would  it  be  to  your  advantage  or  disadvan- 
tage to  have  a  long-term  lease  against  it  ? 

3.  Get  a  copy  of  a  lease  on  property  in  your  neighborhood 

and  ascertain  its  vital  provisions. 

4.  If  you  lease  a  building  for  five  years  and  desire  to  dispose 

of  the  lease  after  a  period  of  three  years,  how  may 
this  be  done  ? 
$.   Why  are  leases  on  small  houses  of  shorter  duration  than 
upon  large  valuable  properties  ? 


XXII.   BILLS   OF   SALE   AND   DEEDS 

Bill  of  Sale.  Every  important  transaction  in  real  or 
personal  property,  especially  when  immediate  delivery 
cannot  be  made,  should  be  accompanied  with  a  bill  of  sale, 
which  may  take  any  form  that  clearly  expresses  a  trans- 
fer of  interest  in  the  property.  The  facts  contained  in 
the  old  and  formal  style  of  bill  of  sale  shown  in  the  first 
form  on  page  104  could  be  briefly  and  clearly  and  just  as 
legally  expressed  in  the  second  form. 


104  Property 

Bills  of  Sale 


KNOW  ALL  MEN  BY  THESE  PRESEHTS  that  I,  William  King, 
of  the  city  of  Lynchburg,  of  the  county  of 
Campbell,  of  the  state  of  Virginia,  for  and  in 
consideration  of  the  sum  of  one  thousand  dollars 
($1000)  lawful  money  of  the  United  States,  to 
rae  in  hand  paid,  by  George  Carter,  of  the  same 
place,  the  receipt  whereof  is  hereby  acknowledged, 
have  bargained  and  sold,  and  by  these  presents 
do  grant  and  convey  unto  the  said  Oeorge  Carter, 
my  1918  Victor  touring  car. 

In  witness  whereof,  I  have  liereunto  set  nor  hand  and 
ceal,  etc. 


Lynchburg,  Va. ,  May  3,  1918 

I  have  sold  this  day  to  George  Carter  of 
L\-nchburg,  Va.  ,  my  1918  Victor  touring  car  for 
Cne  Thousand  Dollars  ($1000). 


L4J  Ll.Cuxy>*>^c>^^<t.^^-~i 


Deed.  In  its  general  acceptance,  a  deed  is  a  document 
that  conveys  title  outright  to  real  estate.  The  buyer  of  a 
property  is  not  in  full  ownership  of  it  until  he  has  received 
a  deed;  and  it  is  binding  upon  the  seller  to  give  a  good 
deed,  that  is,  to  furnish  a  clear  title  to  the  purchaser.  In 
the  deed  on  page  105,  note  that  the  seller  of  the  property 
is  called  the  grantor  and  the  buyer  the  grantee. 

This  deed  is  a  warranty  deed  because  it  warrants  and 
defends  the  grantee  against  any  and  all  claims  of  other 
persons.  Another  form  of  conveyance  by  a  quitclaim 
deed  conveys  only  such  title  as  the  grantor  possesses, 
leaving  the  grantee  to  take  his  chances  as  to  any  other 
possible  claimants.  Careful  buyers  of  real  property  will 
ulv/ays  secure  a  warranty  deed, 


Bills  of  Sale  and  Deeds  105 

Deed 

THIS  INDENTURE,  made  the  /t'/M  ci.ilf  of  fun&  in  the  year 
of  our  Lord  a'>t&  Uvo-u(umcl  '}tvn&  h  icyiclv&co  a-'rvco  &vanL&e.n, 
between  S'leoZo-n  f.  /CiAn.^-a.tt,  at  the  g'^itif  oi  c4'&^^f'  iJa^k', 
merchant,  and  cfa,vci/v  Stiqa,{)-eth,  ki^  w-vie,,  of  the  one  part, 
grantors,  and  S^ve^cLeA^Uiyk/  3^.  h&v-trv&,  of  the  same  city,  ta^%v-u&Vj 
of  the  other  part,  grantee, 

WITNESSETH,  that  the  grantors  for  and  in  consideration  of  the 
sum  of  t^\^■o-  tliou^a,')^ct  cLo-itaio^  {^^2000  ),  lawful  money  of  the 
United  States  of  America,  unto  them  well  and  truly  paid  by  the  grantee, 
the  receipt  whereof  is  hereby  acknowledged,  have  granted,  bargained, 
and  sold,  released  and  confirmed,  and  by  these  presents  do  grant,  bar- 
gain, and  sell,  release  and  confirm  unto  the  grantee,  his  heirs  and 
assigns  (here  follows  full  description  of  property) 

TO  HAVE  AND  TO  HOLD  the  said  tot  av  ^e^e  ajy  (juncyvct 

{>'hVeJC'  >n-£a-iZ4 ix^f.,  av  t&n&ni&iit  Uv&v&on,  &ve^te-ct,  heredita- 
ments, and  premises  hereby  granted,  or  mentioned  and  intended  so  to 
be,  with  the  appurtenances  unto  the  grantee,  his  heirs  and  assigns,  to 
and  for  the  only  proper  use  and  behoof  of  the  grantee,  his  heirs  and 
assigns  forever,  and  for  the  said  S'vea-to-n'  f.  /Ci/yyi6-<itt  for  himself, 
his  heirs,  executors,  and  administrators,  does  covenant,  promise  and 
agree,  to  and  with  the  grantee,  his  heirs  and  assigns,  by  these  presents, 
that  he,  the  said  r9l£^tcyK  j.  /Ciym.{Hi,tt,  and  his  heirs,  all  and 
singular,  the  hereditaments  and  premises  hereby  granted,  or  mentioned 
and  intended  to  be  so,  with  the  appurtenances,  unto  the  grantee,  his 
heirs  and  assigns,  against  him  the  said  S'leota-yv  ^,  fCv'\ruO'(X,tt, 
and  his  heirs,  and  against  all  and  every  person  whomsoever,  lawfully 
claiming  or  to  claim  the  same  or  any  part  thereof,  by,  from,  or  under 
him,  them  or  any  of  them,  shall  and  will  warrant  and  forever  defend. 

IN  WITNESS  WHEREOF,  the  said  parties  to  the  presents  have 
hereunto  interchangeably  set  their  hands  and  seals.  Dated  the  day 
and  year  above  written. 

cfoAyoA  SCv<ia6-eZk  fCLyvLb-att 


cyiet^ei^€'-'^  cy.  /CJt 


^€^Ji.';^€ 


io6  Property 

Title  Insurance.  In  order  to  secure  a  thorough  investi- 
gation into  the  record  of  a  property  and  to  protect  the 
purchaser  against  old  claims  that  may  arise  after  the 
property  passes  into  his  hands,  it  is  customary  to  have  the 
title  insured  by  a  title  insurance  company.  Such  companies 
trace  the  record  of  the  property  from  its  earliest  history  to 
the  date  of  the  last  transfer,  and  they  issue  a  title  insurance 
policy,  which  protects  the  purchaser  from  loss  due  to  a 
defective  title,  just  as  a  fire  insurance  policy  protects  him 
from  loss  due  to  fire.  Title  insurance  is  not  expensive  and 
is  so  essential  to  security  in  the  possession  of  real  estate 
that  it  should  be  generally  purchased. 

Recording  Deeds.  A  buyer  of  property  is  not  fully 
secured  in  the  possession  of  it  until  his  deed  has  been 
recorded;  that  is,  a  copy  entered  in  the  deed  book  of  the 
recorder  of  deeds  in  the  county  where  the  property  is 
located.  Until  the  transfer  of  title  is  thus  entered,  the 
records  show  ownership  by  the  last  grantor,  and  complica- 
tions in  title  might  arise,  as  the  same  property  might  be 
technically  transferred  to  some  one  else. 

QUESTIONS  AND   EXERCISES 

1.  Why  is  a  bill  of  sale  necessary  for  the  transfer  of  real 

property  and  not  always  for  personal  property? 

2.  Why  is  it  generally  necessary  for  both  husband  and  wife 

to  agree  to  the  sale  of  real  property  ? 

3.  Look  up  the  origin  of  the  expressions :    "  deed  in  fee 

simple,"  "  deed  in  escrow." 

4.  What  claims  constitute  a  fixed  lien  against  real  property 

under  the  laws  of  your  state  ? 

5.  Why  is  title  insurance  more  necessary  in  eastern  than 

in  the  middle  western  states? 


Mortgages  107 

XXm.   MORTGAGES 

Mortgages.  An  instrument  not  essential  to  property 
ownership,  but  quite  common  to  it,  is  the  mortgage,  a 
document  arising  from  the  practice  of  borrowing  money 
and  giving  temporary  title  to  a  portion  of  the  property  to 
secure  the  loan.  Generally  a  promissory  note  passes 
between  the  parties  to  the  loan,  and  the  maker  of  such  a 
note  offers  as  security  for  its  payment  a  right  or  title  to  as 

Mortgage  Note 


$2000aP  Salem.  Mass..  October  1,  1918 

Five  years  after  date  I  promise  to  pay 

to  the  order  of  Samuel  Clement,  for  value  received. 

Two  thousand  ^   Dollars 

with  interest  at  the  rate  of  d%,    interest  payable 

semiannually  on  January  1  and  July  1. 

This  note  is  secured  by  mortgage  on 

real  estate  of  even  date  herewith. 


(/S\OKtt>^    ^^XSlXa^^nyXX^.—) 


much  value  in  certain  of  his  property  as  the  loan  repre- 
sents. If  the  note  is  paid  when  due,  the  mortgage  is 
canceled.  If  it  is  not  paid  then,  or  if  meantime  the  interest 
is  not  paid  as  it  accrues,  the  mortgagee  (the  person  to 
whom  temporary  title  is  given)  is  empowered  to  institute 
foreclosure  proceedings  against  the  mortgagor  (the  person 
granting  temporary  title).  Such  suit  at  law  involves  the 
selling  of  the  property  mortgaged  at  public  sale.  The 
mortgagee  is  entitled  to  just  enough  of  the  proceeds  of  such 
sale  to  meet  the  mortgage  debt  and  the  expense  of  fore- 
closure and  sale.  The  remainder  reverts  to  the  mort- 
gagor. 


io8 


Property 


Kinds  of  Mortgages.  The  following  is  an  illustration  of  a 
real  estate  mortgage  because  it  pledges  real  estate  in  security 
of  the  pa\Tnent  of  the  loan.     Similarly  personal  property 

Real  Estate  Mortgage 


THIS  COTTTRACT  WITNESSETH  THAT  WHEREAS 
Martin  Bellamy,  of  Salem,  Mass., has  this  day 
executed  his  promissory  note  to  Samuel  Clement, 
of  the  same  city,  for  the  sum  of  two  thousand 
dollars  ($2000)  due  five  years  from  date,  with 
interest  at  the  rate  of  five  per  cent. 

NOW,  THEREFORE  the  said  IJartin  Bellamy, 
and  Marguerite,  his  wife,  in  order  to  secure  the 
payment  to  Samuel  Clement, or  his  assigns, of  afore- 
said promissory  note  for  two  thousand  dollars, 
receipt  of  which  is  hereby  acknowledged,  have  sold 

and  conveyed  to  the  said  Samuel  Clement 

(Here  follows  a  description  of  the  property  con- 
veyed   ) 

IT  IS  AGREED  that  if  the  said  Martin 
Bellamy  shall  pay  to  the  said  Samuel  Clement,  or 
his  assigns,  the  sum  promised  in  the  said  note 
according  to  the  conditions  thereof,  then  this  con- 
tract shall  be  null  and  void,  otherwise  to  remain 
in  full  force  and  effect. 

IN  WITNESS  WHEREOF  we  have  hereunto  set 
our  hands  and  seals  this  first  day  of  October,  1918. 


Witnesses: 


may  be  offered  as  a  loan  security,  in  which  case  the  instru- 
ment would  be  called  a  chattel  mortgage. 

Not  infrequently  several  mortgages  are  given  upon  the 
same  property.  Unless  otherwise  provided,  such  mort- 
gages have  priority  in  the  order  of  their  creation.  First 
mortgages,  generally  applicable  to  two  thirds  of  the  value 
of  the  property  mortgaged,  carry  with  them  a  lower  rate  of 


Mortgages  109 

interest  charge  than  second  mortgages,  which  give  prece- 
dence to  first  mortgage  Hens  in  case  of  foreclosure. 

Other  Mortgage  Facts.  Like  the  deed,  the  mortgage 
should  be  recorded,  because  it  affects  the  title  to  the  prop- 
erty. If  a  mortgage  is  assigned  to  a  second  person  as 
mortgagee,  the  assignment  should  also  at  once  be  recorded. 

It  will  be  observed  that  both  in  the  deed  and  in  the  mort- 
gage illustrations,  the  wife  has  entered  into  the  granting  of 
title.  A  husband  carmot  alone  give  a  perfect  title  to  real 
estate,  as  the  wife  is  entitled  to  a  dower  in  such  property, 
and  must  consent  to  the  necessary  title  transfer. 

The  mortgagee,  in  order  to  protect  his  interest  in  the 
property  mortgaged,  should  require  from  the  mortgagor 
a  poHcy  of  fire  insurance.  Mortgages  are  commonly  exe- 
cuted for  a  term  of  five  years,  rarely  for  less  than  three 
years.  They  automatically  extend  themselves  if  neither 
party  desires  to  have  the  loan  paid.  By  agreement  money 
loaned  on  mortgage  may  be  paid  in  installments,  each  pay- 
ment being  indorsed  on  the  note.  The  unmortgaged  in- 
terest in  property  constitutes  the  owner's  equity. 

QUESTIONS   AND   EXERCISES 

1.  How  do  the  rights  of  a  modern  mortgage  holder  differ 

from  those  of  earlier  days  ? 

2.  Get  a  copy  of  a  mortgage  and  analyze  its  provisions. 

3.  Should  you  prefer  to  hold  a  mortgage  on  a  centrally 

located  business  property  or  on  a  house  in  a  residential 
district  of  a  city?     Give  reasons. 

4.  Find  out  whether  money  is  loaned  on  second  mortgage 

in  your  community. 

5.  What  margin  of  security  is  usually  required  when  a  first 

mortgage  is  placed ?     Why? 


1 10  Property 

XXIV.   DISTRIBUTION   OF  PROPERTY 
ESTATES 

Methods  of  Distribution.  Property  of  deceased  persons 
is  disposed  of  in  one  of  two  ways : 

(i)  By  statute  law,  which  in  the  main  provides  fairly  for 
the  distribution  of  real  estate  and  personal  effects  to  the 
heirs  or  next  of  kin  entitled  to  it. 

(2)  By  will,  an  instrument  by  which  a  person  disposes  of 
his  property  as  he  sees  fit,  disregarding  his  natural  heirs,  if 
he  pleases,  except  as  the  law  may  forbid.  For  instance,  the 
law  in  most  states  guarantees  to  the  wife  a  one-third  interest 
for  life  in  her  husband's  real  estate  and  a  one-third  share 
of  his  personal  property  outright.  This  interest,  therefore, 
he  cannot  will  away. 

In  the  case  of  small  property  interests  and  of  normal 
family  relations,  there  is  no  real  need  of  making  a  will,  as 
the  impartial  provisions  of  the  state  for  the  distribution  of 
such  property  are  generally  satisfactory  to  all  parties  con- 
cerned. When  there  is  no  will,  the  owner  of  the  property 
is  said  to  die  intestate.  When  the  estate  is  large  or  when 
the  owner  of  a  small  estate  wishes  to  discriminate  between 
certain  of  his  heirs  and  next  of  kin,  or  wishes  to  bequeath 
property,  or  some  of  it,  to  persons  outside  of  his  family,  a 
will  is  necessary. 

How  to  Make  a  Will.  Any  person  of  sound  mind  and 
of  legal  age  may  make  a  will,  disposing  of  both  real  and 
personal  property.  Persons  under  legal  age,  as  boys  under 
twenty-one  or  girls  under  eighteen,  may  by  will  bequeath 
personal  property.  A  will  should  be  in  writing;  but  no 
set  form  is  required,  the  law  being  satisfied  with  a  clear  ex- 
pression of  the  wishes  of  the  testator,  as  the  person  making 


Distribution  of  Property  Estates  in 

the  will  is  called.  The  signature  to  the  will  must  be  wit- 
nessed by  two  persons,  called  witnesses.  These  persons 
need  not,  and  generally  do  not,  know  the  contents  of  the 
will.  No  beneficiary  should  be  a  witness,  as  it  would  invali- 
date his  share  of  the  bequest. 

Will 


MOW  ALL  MEH  BY  THESE  PRESENTS  THAT  I, 
James  Orr,  of  the  city  of  Goldsboro,  of  the  coun- 
ty of  Wayne,  of  the  state  of  North  Carolina,  be- 
ing of  sound  mind  and  memory,  do  make,  publish, 
and  declare  this  my  last  will  and  testament,  in 
manner  following,  that  is,  to  say: 

First:   I  direct  that  all  my  debts  and 
funeral  expenses  shall  be  paid. 

Second;   I  give  and  bequeath  to  my  son 
William  Orr,  five  thousand  dollars  ($5000). 

Third:   I  give  and  bequeath  to  the  Orr 
Hospital  of  Goldsboro  three  thousand  dollars 
($3000). 

Fourth:   I  give,  devise,  and  bequeath 
to  my  wife,  Elizabeth  Orr,  all  the  rest,  residue, 
and  remainder  of  my  estate,  both  real  and  person- 
al, in  lieu  of  her  right  of  dower. 

Lastly:   I  hereby  appoint  Henry  Watson 
executor  of  this  my  last  will  and  testament, 
hereby  revoking  all  former  wills  by  me  made. 

IN  WITNESS  WHEREOF,    I  have  hereunto 
subscribed  my  name  this  tenth  day  of  June  in  the 
year  of  our  Lord  one  thousand  nine  hundred  and 
eighteen. 


.JtuSx^^tSjt:^ 


Witnesses:^      ^ 


There  are  some  unwritten  wills,  made  by  men  in  the  serv- 
ice of  the  army  and  the  navy,  or  by  persons  meeting  with 
fatal  accidents,  who  must  make  wills  under  conditions  that 
will  not  admit  of  preparing  written  instruments.  The 
validity  of   such   wills  rests   upon   the  circumstances  at- 


112  Property 

tending  their  making  and  on  the  reliability  of  the  witnesses. 
As  a  rule,  only  personal  properly  may  be  disposed  of  in  this 
manner. 

Executing  or  Administering  Wills.  Upon  the  death  of 
a  property  owner  his  will  is  read,  in  order  to  learn  its 
provisions  as  to  bequests  and  the  name  of  the  person 
or  institution  authorized  to  carry  out  or  execute  its 
provisions.  If  no  person  has  been  named  as  executor, 
or  if  the  one  so  named  refuses  to  act,  the  court,  called  the 
probate  court  in  some  states,  and  the  surrogate's  court 
or  the  orphans"  court  in  others,  must  appoint  some  one 
to  settle  the  estate.  Such  a  person  is  known  as  the 
administrator.  A  woman  appointed  as  executor  or  as  ad- 
ministrator is  sometimes  called  respectively  an  executrix 
or  an  administratrix. 

It  is  the  business  of  an  executor  to  carry  out  faithfully 
the  provisions  of  the  will.  The  will  usually  states  whether 
or  no:  the  executor  must  give  a  bond  for  the  performance  of 
his  duties.  An  administrator,  as  a  rule,  takes  charge  of  an 
estate  of  one  who  has  died  without  leaving  a  will.  He 
must  give  a  bond  for  the  faithful  performance  of  his  duties. 
The  administrator's  course  of  action  generally  runs  thus : 
First,  he  determines  the  extent  and  the  value  of  the 
property  of  the  estate  as  well  as  of  its  debts.  Then  he  pays 
the  debts,  consisting  of  expenses  of  last  illness  and  burial, 
widow's  dower,' state  debts,  and  claims  of  creditors.  What 
remains,  if  anything,  is  then  paid  to  the  legal  heirs.  A 
careful  accounting  of  every  step  in  the  settlement  is  made, 
and  when  the  process  of  closing  the  estate  is  completed,  a 
statement  of  the  entire  proceeding  is  made  to  the  court. 
If  such  a  statement  is  satisfactory,  the  court  then  discharges 
the  administrator. 


Distribution  of  Property  Estates  1 1 3 

The  Trust  Company  as  an  Executor  or  Administrator. 

Prior  to  the  formation  of  the  so-called  trust  companies,  the 
settlement  of  estates  was  in  the  hands  of  individuals.  The 
owner  of  the  property  about  to  make  a  will  would  select  a 
member  of  his  family  or  a  friend  as  an  executor,  preferably 
a  lawyer  or  a  business  man ;  and  the  court  in  appointing 
an  administrator  would  do  likewise,  after  consulting  with 
the  heirs.  The  inexperience  and  unreHabiHty  of  individ- 
uals thus  chosen  furnished  good  ground  to  the  trust 
company  for  offering  its  services  in  this  capacity.  Indeed, 
the  trust  company  of  to-day  is  equipped  as  no  mdividual 
can  be  for  the  prompt,  efficient,  and  economical  admin- 
istration of  estates  and  trusts  of  all  kinds.  The  com- 
plexity of  its  organization,  its  departments  of  legal  advice, 
real  estate,  investments,  banking,  etc.,  afford  it  such  facili- 
ties for  conducting  and  closing  estates  that  it  is  named 
with  increasing  frequency  as  executor  or  administrator. 

Since  more  than  one  person  may  be  selected  as 
executor,  it  is  well  in  drawing  a  will  to  choose  a  trust 
company  and  a  member  of  the  family,  say  a  son.  This 
guarantees  a  prompt  and  businesslike  settlement  of  the 
estate,  and  at  the  same  time  provides  for  a  family  connec- 
tion with  its  settlement,  which  is  most  desirable. 

The  Trust  Company  as  Trustee.  Among  the  various 
other  powers  granted  to  the  trust  company  by  state  charters 
may  be  mentioned  the  following:  (i)  to  act  as  trustee  of 
property  of  any  and  all  kinds  left  with  it  as  guardian  of 
minors ;  (2)  to  act  as  agent  in  the  management  of  real 
property ;  (3)  to  act  as  receiver  for  defunct  concerns  of  all 
kinds  and  those  needing  reorganization ;  (4)  to  act  as 
depository  for  trust  funds,  securities,  and  other  personal 
property. 

EL.  OF  BUS. — 8 


1 14  Property 

The  safe-deposit  departments  of  trust  companies  render 
an  increasingly  large  and  valuable  service  to  the  public. 
Their  vaults  contain  receptacles  of  all  sizes  that  may  be 
rented  by  the  year  at  a  moderate  rate.  There  is  little  need 
to-day  for  the  individual  safe  or  strong  box  in  the  house  ; 
valuables  of  all  kinds  are  more  conveniently  and  safely 
cared  for  in  the  safety-deposit  boxes  provided  by  many 
banks  as  well  as  by  trust  companies. 

The  charges  or  commissions  of  the  trust  company 
are  generally  systematized  and  uniform ;  those  of  the 
personal  agent  are  Ukely  to  be  uncertain  and  uneven.  The 
benefits  of  combining  many  processes  in  one  organization 
and  the  resulting  economies  in  administration  have  brought 
to  the  trust  company  much  business  of  a  banking  and 
trust  nature  that  formerly  required  for  completion  the 
services  of  several  independent  agencies. 

QUESTIONS   AND    EXERCISES 

1.  A  man  having  a  $100,000  estate  dies  intestate.     What 

provisions  are  made  by  your  state  for  the  distribution 
of  the  estate  among  his  wife  and  children  ? 

2.  What  steps  must  be  taken  by  an  executor  in  closing  an 

estate  and  what  compensation  is  allowed  him  under 
the  law? 

3.  A  man  without  direct  heirs  dies  without  making  a  will. 

In  what  order  are   collateral  heirs  entitled   to   his 
property  ? 

4.  What  disposition  is  made  of  an  estate  if  no  heirs  can  be 

found  ? 

5.  What  legal  idea  is  back  of  the  practice  of  giving  an  heir 

only  one  dollar  ? 


Taxation  1 1 5 

XXV.     TAXATION 

Nature  of  Taxation.  Taxes  are  charges  laid  upon  persons 
or  property  for  the  support  of  government.  In  the  older 
days  taxes  were  levied  regularly  and  irregularly.  When  a 
ruler  needed  funds  for  his  own  expenditure  or  to  carry  on 
war,  he  simply  levied  additional  taxes,  in  the  form  of  duties 
on  exports  or  on  imports.  These  taxes  were  at  the  personal 
disposal  of  the  ruler. 

The  struggle  of  modern  nations  for  political  freedom 
centers  in  no  small  degree  around  the  problem  of  getting 
control  of  the  public  purse.  Our  own  Revolutionary  War 
was  aroused  by  various  acts  of  tyranny,  but  none  more 
important  than  "  taxation  without  representation."  Since 
we  now  hold  that  "  government  derives  its  just  powers 
from  the  consent  of  the  governed,"  the  assessment  and 
levying  of  taxes  is  particularly  the  concern  of  the  direct 
representatives  of  the  people  in  our  legislative  assemblies. 

Federal  Taxes.  The  Federal  government  of  the  United 
States  derives  its  revenues  in  the  main  from  indirect  taxes, 
that  is  to  say,  taxes  le\'ied  not  upon  individuals  but  upon 
the  production  and  the  sale  of  articles.  In  ordinary  times, 
the  main  revenue  comes  from  customs  and  internal  revenue. 

Customs  or  duties  are  taxes  paid  on  articles  imported 
from  abroad.  The  law  that  contains  the  schedules  of 
articles  of  import,  the  classification  of  articles,  and  the 
rates  of  duties  levied  on  them,  is  called  a  tariff.  The  purpose 
of  our  tariff  on  imported  goods  is  twofold  :  first,  to  raise 
revenue ;  and  second,  to  foster  American  industries  by 
making  it  expensive  to  import  articles  that  would  compete 
in  price  with  those  made  at  home. 

Customs  or  duties   levied  under  the  tariff  system  are 


ii6  Property 

collected  al  tustomliouses  :il  the  principal  ports,  along  the 
borders  of  Cana(hi  and  Mexico,  and  at  some  large  inland 
cities.  Wlien  goods  are  purchased  in  foreign  countries  for 
importation  into  the  United  States,  the  importer  must  file 
with  the  United  States  consul  at  the  foreign  port  from  which 
they  are  to  be  shipped  an  invoice  covering  a  list  of  the 
goods  and  their  value  at  the  place  where  they  were  manu- 
factured or  produced.  The  consul  certifies  the  accuracy  of 
the  invoice  and  sends  a  copy  of  it  to  the  collector  of  the  port 
in  the  United  States  at  which  the  goods  are  to  be  landed. 
Upon  arrival  at  this  port,  the  shipment  is  examined  by  the 
customs  officers  to  see  that  it  corresponds  with  the  descrip- 
tion in  the  invoice.  If  there  is  evidence  of  fraud,  a  heavy 
fine  is  imposed  on  the  importer,  or  the  goods  are  confis- 
cated. If  it  is  found  that  the  goods  are  undervalued, 
their  value  is  raised  by  the  customs  appraiser. 

In  personal  traveling  only' a  Hmited  amount  of  goods 
purchased  abroad  may  be  brought  to  this  country  free  of 
duty.  Any  concealment  of  goods  from  the  customs  in- 
spectors, technically  known  as  "  smuggling,"  is  punishable 
by  a  heavy  fine  and  by  confiscation  of  the  goods,  which  are 
generally  seized  by  the  customhouse  or  Treasury  officials 
and  sold  at  public  auction.  Care  should  be  taken,  therefore, 
to  make  out  an  accurate  declaration,  or  statement,  of 
goods  to  be  brought  into  the  country,  a  copy  of  which  must 
be  handed  to  the  customs  officer  in  charge  of  inspection  at 
the  port  of  entry. 

Another  form  of  tax  levied  by  the  Federal  government  is 
the  income  tax.  During  the  Civil  War  incomes  from  $600 
to  $5000  paid  to  the  Federal  government  a  tax  of  5  % ; 
incomes  above  $5000,  a  tax  of  10%.  In  1894  an  effort 
to  impose  an  income  tax  was  nullified  by  a  decision  of  the 


Taxation 


117 


Supreme  Court  of  the  United  States  that  it  was  uncon- 
stitutional. In  1913,  however,  the  demand  for  an  income 
tax  had  become  so  great  that  the  Sixteenth  Amendment 
to  the  Constitution  was  adopted  to  provide  for  such  a 
tax.  Under  this  act  the  Federal  government  levied  an  in- 
come tax,  which,  as  provided  in  the  law  of  1916,  exempts 
$3000  for  every  individual  and  $4000  for  every  married  couple 
or  for  the  head  of  a  family.  Moreover,  by  the  law  of  191 7, 
war  income  taxes  were  levied  under  which  exemptions  were 
fixed  at  $1000  for  single  persons  and  $2000  for  married 
couples,  or  for  heads  of  families,  with  an  allowance  of  a 


Income  Tax  Rates 


Under 

Act  of 

Total  Income 
Tax 

1916 

1917 

Normal  Tax 

On  net  incomes  over  exemptions 

2% 

2% 

4% 

Progressive  Tax 

Over       $5,000  to 

$7,500 

none 

1% 

1% 

7,500 

10,000 

none 

2% 

2% 

10,000 

12,500 

none 

3% 

3% 

12,500 

15,000 

none 

4% 

4% 

15,000 

20,000 

none 

5% 

5% 

20,000 

40,000         ^ 

r% 

7% 

8% 

40,000 

60,000 

2% 

10% 

12% 

60,000 

80,000 

3% 

14% 

17% 

80,000 

100,000 

4% 

18% 

22% 

100,000 

150,000 

5% 

22% 

27% 

150,000 

200,000 

6% 

25% 

31% 

200,000 

250,000 

7% 

30% 

37% 

250,000 

300,000 

8% 

34% 

42% 

300,000 

500,000 

9% 

37% 

46% 

500,000 

750,000 

io% 

40% 

50% 

750,000 

1 ,000,000 

10% 

45% 

55% 

1 ,000,000 

1,500,000 

11% 

50% 

61% 

1,500,000 

2,000,000 

12% 

50% 

62% 

2,000,000 

13% 

50% 

63% 

iiS 


Property- 


special  exemption  of  $200  for  each  dependent  child  under 
eighteen  years  of  age.  These  taxes  were  made  progressive, 
that  is,  the  rate  was  made  higher  as  the  amount  of  income 
increased.  In  the  table  on  page  117  the  tax  rates  of  the 
Act  of  1 91 6  and  those  of  the  Act  of  191 7  must  be  added 
together  to  determine  the  total  income  tax. 

In  addition  to  the  tariff  duties  and  income  taxes,  the 
Federal  government  resorts  to  other  forms  of  taxation.  It 
levies  upon  articles  raised  or  produced  in  the  country,  such 
as  tobacco,  liquor,  and  toilet  articles.  These  taxes  are 
termed  internal  revenue  taxes,  and  are  payable  by  stamps 
secured  from  the  collector  of  internal  revenue  and  affixed 
to  the  articles  before  sale. 

Another  minor  source  of  Federal  revenue  is  the  pro- 
gressive tax  on  legacies.  The  inheritance  tax  of  1916 
exempts  $50,000  from  an  estate  left  by  a  resident  of  the 
United  States.  After  debts  and  the  $50,000  are  de- 
ducted, the  rates  on  the  net  estate  are  as  follows : 

Inheritance  Tax  Rates 


Over     $50,000  to  $150,000    . 

150,000          250,000    . 

250,000         450,000    . 

450,000  1 ,000,000  . 
1,000,000  2,000,000  . 
2,000,000  3,000,000  . 
3,000,000  4,000,000  . 
4,000,000  5,000,000  . 
5  000  000 

2% 
3% 
4% 
5% 
6% 
7% 
8% 
9% 
10% 

Under  the  emergency  created  by  war  conditions  in  191 7, 
new  stamp  taxes  upon  internal  business  were  put  into  force, 
being  made  applicable  to  amusements,  railroad  tickets, 
telegraph  and  telephone  messages,  etc.  Taxes  were 
imposed  also  on  important  papers  and  transfers  of  prop- 


Taxation  1 19 

erty,  promissory  notes,  acceptances,  and  other  evidences 
of  debt.     These  are  kno.wn  as  document  taxes. 

State  and  Local  Taxes.  The  taxes  levied  by  the  different 
states  and  by  their  subdivisions  vary  with  the  states  and 
with  their  needs.  In  the  main,  the  taxes  imposed  are  direct, 
that  is,  levied  upon  persons  and  property  directly.  Some 
states  levy  a  tax  upon  personal  property ;  some  levy  an 
income  tax ;  many  of  them  impose  an  inheritance  tax  upon 
property  transferred  by  will  or  inherited  under  the  law.  A 
large  number  of  states  tax  corporations,  as  well  as  profes- 
sions, and  such  effects  as  mortgages,  bank  stocks,  chattels, 
and  machinery. 

Counties  and  townships  levy  taxes  upon  land  and  various 
occupations.  Cities  levy  taxes  on  real  estate  within  the 
city  Hmits  as  well  as  on  personal  property.  They  also 
impose  a  tax  for  water  and  light  where  the  city  owns  the 
plants.  Under  the  head  of  taxes  imposed  by  local  govern- 
ments come  assessments-  made  upon  property  holders 
when  a  street  is  opened  and  paved  or  when  other  improve- 
ments are  undertaken,  —  the  government  holding  that 
the  improvement  has  benefited  the  property  and  that 
therefore  the  beneficiary,  or  owner,  should  pay  toward  the 
betterment. 

Direct  taxes  are  levied  either  according  to  the  sworn 
statements  or  returns  which  the  taxpayer  makes  of  the  value 
of  his  individual  property  holdings,  or  according  to  the 
valuation  of  the  taxable  property  made  by  a  board 
of  assessors.  This  board  is  supposed  to  be  familiar  with 
the  value  of  property  in  different  locaUtics  and  to  make  an 
honest  appraisement.  The  rate  of  taxation  is  estabHshed 
by  the  various  governmental  authorities  according  to  their 
financial  needs,  after  valuations  are  returned  by  the  board 


120  Property 

of  assessors.  A  reasonable  time  is  usually  allowed  to  prop- 
erty owners  in  which  to  object  to  the  valuation  placed  upon 
their  property.  When  the  taxes  are  unpaid  for  a  specified 
time,  the  property  is  advertised  for  sale  and  the  sheriff 
levies  on  it  and  sells  it  for  the  taxes.  Under  some  circum- 
stances, the  property  may  be  bought  back  within  a  limited 
time  by  payment  of  the  taxes  plus  the  cost  of  advertising, 
sale,  and  interest.  The  right  to  do  this  is  called  the  equity 
of  redemption. 

To  these  forms  of  state  and  local  taxes  must  be  added 
the  poll  tax  levied  generally  upon  every  citizen  entitled 
to  vote.  This  tax  is  a  fixed  sum,  usually  from  fifty  cents 
to  a  few  dollars,  and  the  uses  to  which  it  is  devoted  are 
various.  Some  states  devote  it  solely  to  education ; 
others  to  election  expenses ;  while  others  regard  it  as  part 
of  the  revenue  of  local  government  to  be  spent  for  local 
purposes. 

It  is  largely  by  means  of  ta'xation  that  the  Federal, 
state,  and  local  governments  pay  the  expenses  for  military, 
naval,  police,  fire,  and  health  protection ;  for  the  erection 
and  the  maintenance  of  public  buildings  ;  for  the  construc- 
tion and  the  operation  of  irrigation  works ;  for  river  and 
harbor  improvements ;  for  agricultural  experimentation ; 
for  education ;  and  for  the  relief  of  the  poor.  It  is  con- 
sequently to  the  interest  of  every  citizen  to  meet  promptly 
and  honestly  the  obligations  imposed  upon  him  by  taxa- 
tion. 

QUESTIONS  AND  EXERCISES 

I.    What  is  the  difference  between  a  national  policy  of       I 
free   trade   and   one   of  protection?     Think   out   as 
many  arguments  in  favor  of  each  as  possible. 


Taxation  1 2 1 

Find  out  what  the  tarilT  rates  are  on  several  kinds 
of  manufactured  woolen  goods,  on  a  number  of  iron 
and  steel  products,  and  on  sugar ;  and  determine  who 
ultimately  pays  the  tax. 

Look  up  the  assessed  valuation  of  several  real  estate 
properties  in  your  own  immediate  neighborhood  and 
several  in  other  \dcinities.  Compare  the  valuations 
with  one  another  and  with  the  market  value  of  the 
properties,  and  endeavor  to  explain  the  variation. 

What  is  the  rate  of  real  estate  tax  in  your  locality? 
How  much  must  be  paid  on  personal  property,  and 
how  much  inheritance  tax  is  collected  by  your  state  ? 

What  is  meant  by  "  single  tax,"  and  what  are  some  of 
the  arguments  in  its  favor? 


PART  V 

INVESTMENTS 

XXVI.   BOND    INVESTMENTS 

Investment  and  Speculation.  Before  considering  the 
character  and  merits  of  securities,  it  would  be  well  to  agree 
upon  the  distinction  between  a  security  as  an  investment 
and  a  security  as  a  speculation.  Investment  and  specula- 
tion and  the  processes  they  signify  are  much  confused  in 
the  popular  mind. 

Speculation,  as  defined  in  one  of  the  accepted  dictionaries, 
is  "  the  act  or  practice  of  buying  land,  goods,  shares,  etc., 
in  expectation  of  selling  at  a  higher  price,  or  of  selling  in 
expectation  of  repurchasing  at  a  lower  price."  Another 
dictionary  defines  it  as  "  trading  on  anticipated  fluctua- 
tions in  price,  as  distinguished  from  trading  in  which  the 
profit  expected  is  the  difference  between  the  retail  and  the 
wholesale  prices,  or  the  difference  of  price  in  different 
markets."  Still  another  source  defines  speculation  as  "  any 
business  venture  involving  imusual  risks  for  a  chance  of 
an  unusually  large  gain  or  profit." 

In  these  three  definitions  of  speculation,  three  ideas  pre- 
dominate—  risk  of  principal,  desire  for  unusual  profit  in 
the  transaction,  and  absence  of  income.  Any  transaction, 
therefore,  in  which  these  elements  predominate  is  a  specu- 
lative transaction.     We  may  assume,  then,  that  the  direct 


Bond  Investments 


123 


antithesis  of  such  a  transaction  is  an  investment,  the  re- 
quisites of  which  are  security  of  principal,  indifiference  to 
profit,  and  certainty  of  income.  Speculation  aims  at  large 
profit  and  is  attended  with  unusual  risk.  Investment  aims 
at  income  and  should  be  attended  with  safety  of  principal. 
The  man  who  to-day  buys  stock  at  $95  a  share  with  the 
expectation  of  selling  it  to-morrow 
or  next  week  at  $96  or  more,  is 
speculating;  but  the  man  who 
buys  the  same  stock  outright  and 
holds  it  for  the  sole  purpose  of 
receiving  the  five  per  cent  divi- 
dend which  it  pays  is  investing. 

We  are  now  ready  to  consider 
security  fields  in  which  money 
may  be  safely  invested  and  yield 
a  satisfactory  income. 

Bonds.  A  bond  is  a  receipt 
for  money  borrowed  and  a  prom- 
ise to  pay  interest  on  it  at  a  fixed 
annual  rate  and  to  return  the 
principal  at  the  end  of  a  specified 
term  of  years.  The  security  to 
such  promise  may  be  either  per- 
sonal or  lien.  Bonds  arise  out  of 
the  needs  of  national  and  local 
governments,  corporations,  and  other  concerns,  for  funds 
with  which  to  carry  out  new  enterprises.  Such  funds  must 
be  borrowed  either  directly  from  the  people  or  indirectly 
through  bankers,  and  the  bonds  represent  the  written  obli- 
gations of  the  borrowers.  As  defined  above,  a  bond  is  a 
type  of  promissory  note,  the  only  difference  being  that  the 


124 


Investments 


Bond  Investments  125 

bond  is  a  long-time  loan  mstrumeiit,  generally  from  twenty 
to  thirty  years,  and  is  more  formal  and  pretentious  in  char- 
acter. The  bond  is  a  form  of  serial  note,  the  particular 
purpose  of  which  is  to  admit  of  the  borrower's  dividing 
his  relatively  large  debt  into  convenient  unit  amounts 
usually  of  $ioco  or  $500.  A  corporation  might  have  difh- 
culty  in  borrowing  $100,000  from  a  single  banker  on  one 
note  of  that  amount,  and  yet  might  have  no  trouble  in 
finding  one  hundred  bankers  or  business  men  willing  to 
lend  it  $1000  apiece,  each  to  take  from  the  corporation  a 
bond  for  that  amount. 

Bonds  are  frequently  issued  in  low  amounts  so  that  they 
may  be  available  to  people  with  small  savings.  In  order  to 
stimulate  popular  buying,  the  United  States  government, 
with  a  view  to  paying  the  expenses  of  the  Spanish  War 
in  1898,  issued  $20  bonds.  United  States  postal  savings 
bonds  are  issued  in  denominations  of  $20,  $100,  and  $500. 
The  bonds  of  the  first,  second,  and  third  Liberty  Loans  were 
issued  in  denominations  of  $50,  $100,  $500,  and  $1000. 

Kinds  of  Bonds.  Bonds  may  be  grouped  under  five 
general  heads :  (i)  govermnent  bonds,  or  those  issued  by 
the  Federal  government ;  (2)  state  and  municipal  bonds,  or 
those  issued  by  states,  cities,  villages,  counties,  and  school 
districts ;  (3)  railroad  bonds,  the  issue  of  railroad  com- 
panies ;  (4)  public  utility  bonds,  such  as  emanate  from 
corporations  that  serve  cities,  namely,  street  railways, 
water,  gas,  and  electric  companies,  etc. ;  and  (5)  industrial 
bonds,  the  obligations  of  companies  engaged  in  general 
commercial  and  industrial  enterprises. 

Bonds  are  further  divided  into  two  general  classes : 
(a)  coupon  and  {b)  registered.  Coupon  bonds  are  usually 
made  payable  to  bearer,  both  as  to  interest  and  principal. 


126 


Investments 


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and  are  accompanied  by  small  interest-due  notes,  called 

coupons,  which  arc  detached  and  presented  for  payment 

as  they  mature.     Registered  bonds  require  the  recording 

„  of  the  names  of  the 

Coupon  ,    ,, 

holders     upon     the 

books  of  the  obli- 
gated company  and 
provide  for  the  pay- 
ment of  interest  by 
check  to  such  hold- 
ers or  owners. 

Bond  Securities. 
In  the  case  of  gov- 
ernment and  state  and  municipal  bonds,  the  good  name  of 
the  authority  issuing  the  bonds  is  the  security  for  their  pay- 
ment when  due,  as  well  as  for  the  payment  of  interest 
accruing  annually.  We  freely  lend  money  to  our  nation, 
state,  or  city  because  we  have  faith  in  the  governing 
authority. 

Our  feeling  toward  railroad  companies,  public  service 
corporations,  and  commercial  and  industrial  organizations 
in  general,  is  quite  different.  The  greater  risks  attending 
the  development  of  such  enterprises  prompt  us  to  demand 
a  positive  guaranty  for  the  return  of  money  lent,  and 
hence  their  bonds  are  generally  secured  by  mortgages  on 
property. 

Lien  Security  Bonds.  Various  kinds  of  property  are  of- 
fered in  security  of  bonded  indebtedness  —  lands,  buildings, 
stocks,  other  bonds,  etc.  Bonds  are  usually  known  by  the 
kind  of  lien  security  underlying  them.  Lien-secured  bonds 
may  usually  be  found  under  one  or  the  other  of  the  following 
six  heads  :   (i)  first  mortgage  bonds,  which  have  first  claim 


Bond  Investments  127 

upon  certain  specified  real  property ;  (2)  second  mortgage 
bonds,  with  a  second  claim  upon  certain  specified  real 
property ;  (3)  general  mortgage  bonds,  secured  by  a  mort- 
gage on  all  the  real  property  of  the  issuing  company ; 
(4)  consolidated  mortgage  bonds,  secured  by  a  general 
mortgage  on  the  properties  of  the  companies  that  have  been 
consoHdated ;  (5)  collateral  trust  bonds,  secured  by  stocks 
and  other  bonds  deposited  with  a  trust  company  that  acts 
as  trustee ;  (6)  refunding  bonds,  which  are  the  outgrowth 
of  a  new  loan  created  to  pay  off  bonds  that  have  matured. 

There  are  various  other  kinds  of  bonds,  the  special 
object  for  which  the  loan  was  created  determining  the 
exact  character  of  the  obligation.  For  instance,  in  rail- 
road finance  we  find,  among  others,  these  special  issues : 
equipment  bonds,  sometimes  called  car-trust  certificates, 
which  are  supported  by  mortgages  on  the  equipment  pur- 
chased ;  convertible  bonds,  or  such  as  may  be  converted  into 
the  stock  of  the  company,  if  the  holder  so  desires ;  deben- 
ture bonds,  which  as  a  rule  are  nothing  more  than  promises 
to  pay,  with  the  credit  only  of  the  issuing  company  as 
security. 

Merits  of  Bonds.  The  value  of  any  bond  is  dependent 
upon  (i)  its  security,  (2)  the  rate  of  interest,  (3)  the 
length  of  the  bond  term,  and  (4)  marketability.  A  good 
bond  proposition  depends,  too,  upon  the  financial  purpose 
that  the  instrument  is  to  serve.  Judged  by  these  standards, 
we  may  now  consider  the  merits  of  the  several  kinds  of 
bonds  mentioned  above. 

Government  bonds  meet  all  the  requirements  of  a  good 
bond  investment,  except  that  of  interest  earned.  As  our 
national  banking  law,  until  recently,  made  it  imperative 
upon  banks  to  own  government  bonds  as  the  basis  of  their 


128  Investments 

currency  issues,  these  IjoikIs  were  purchased  mainly  by 
banks.  StabiUty  is  their  great  merit.  The  usual  interest 
rates,  of  2  %  or  3  %,  are  lower  than  the  average.  The 
bonds  of  the  Second  Liberty  Loan,  however,  pay  4  %  inter- 
est and  those  of  the  Third  Liberty  Loan,  4t%-  They 
have  the  further  advantage  of  being  almost  entirely  free 
from  taxation. 

State  and  municipal  bonds,  especially  the  issues  of  our 
principal  states  and  cities,  are  safe  investments  and  are 
usually  exempt  from  certain  classes  of  taxation.  They  are 
fairly  good  income  producers,  averaging  about  4  %.  Even 
at  this  rate,  however,  they  must  be  recommended  mainly 
for  their  stability  and  secondarily  for  their  earning  power. 
The  bonds  of  towns,  counties,  and  townships,  whose  credit 
is  not  so  well  established,  yield  a  higher  interest  rate,  but 
at  the  expense  of  stability. 

In  the  field  of  railroad  and  public  utility  bonds  we  find 
in  normal  times  the  best  opportunities  for  investments 
that  are  at  once  reasonably  safe  and  fairly  remunera- 
tive. Here  stability  and  income  reach  the  fairest  balance. 
Of  course,  all  bonds  of  this  class  do  not  possess  equal 
merit,  and  much  care  must  be  exercised  in  making  a  choice ; 
but  on  the  whole  they  may  be  purchased  with  the  fair 
assurance  that  a  satisfactory  investment  is  being  made. 
As  mortgage  securities  underlie  these  bonds,  the  values  of 
properties  so  mortgaged  should  be  investigated  in  order 
to  determine  the  worth  of  the  securities  themselves. 
Reliable  real  estate  or  other  property  mortgages  usually 
constitute  such  securities;  hence  the  element  of  stability 
may  be  assumed  to  be  adequate,  and  attention  should  be 
given  mainly  to  income,  which,  as  a  rule,  should  grade  |% 
to  I  %  higher  than  that  of  state  and  municipal  bonds 


stock  Investments  129 

Industrial  bonds  rank  lowest  in  point  of  safety  of  princi- 
pal, because  less  stable  types  of  securities  accompany  them 
and  because  greater  uncertainties  attend  the  development 
of  all  private  commercial  enterprises.  Though  generally 
not  classed  among  speculative  securities,  industrial  bonds 
approach  nearest  to  that  classification. 

QUESTIONS   AND   EXERCISES 

1.  Explain  the  difference    from  an    investor's   viewpoint 

between  the  following  transactions  :  buying  an  unim- 
proved seashore  lot  and  purchasing  a  house  for  rental 
purposes. 

2.  A   city,  wishing  to  pave  streets,  issues  a  twenty-year 

bond  series  in  order  to  raise  the  necessary  funds. 
Is  this  good  or  bad  practice,  and  why? 

3.  Why  is  a  purchase  of  industrial  bonds  likely  to  be  more 

speculative  than  a  purchase  of  government  bonds  ? 

4.  How  do  the  two  bonds  following  compare  in  merit :    a 

first-mortgage  bond  issued  by  a  railroad  company 
and  a  debenture  bond  issued  by  a  mining  company? 

5.  Contrast  the  investment  features  of  bonds  of  a  railroad 

operating  in  an  industrial  district  with  those  of  a 
road  operating  in  an  agricultural  section. 

XXVII.    STOCK   INVESTMENTS 

Stocks,  or  Stock  Certificates.  Stocks,  or  stock  certifi- 
cates, are  the  issues  of  corporations  or  stock  companies 
which  certify  that  the  holder  in  each  instance  is  an  owner 
of  the  capital  stock  of  the  company  to  the  amount  stated 
in  the  certificate. 

V  corporation  is  an  association  of  individuals  incorporated , 
or  cluirtered,  by  some  state  for  the  purpose  of  conducting 

EL.  OF  BUS.  —  9 


1 30  Investments 

certain  kinds  of  business  stated  in  the  charter.  One  of  the 
privileges  granted  by  the  state  is  to  sell  stock  or  shares,  as 
they  are  called,  in  the  business  to  any  one  who  may  wish  to 
buy.     These  shares  vary  in  value  according  to  the  wish 

Stock  Certificate 


INCORPORATED  UNDER  THE  LAWS  OF  THE  STATE  OF  MINNESOTA 
t\c.    /(?03  /O    Shares 


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ft  xiTjieiuj''  ciuLoXAed. 

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6imud  {uiididu'didAcuitdcffiauandlc  k  sa&d  u^th/fad  efifiii  ccuuruSmi 


of  the  incorporators ;  but  each  company's  shares  are  always 
of  the  same  denomination;  as,  for  instance,  $100,  $50, 
$25,  $10,  $5,  or  even  lower. 

All  purchasers  receive  stock  certificates  from  the  com- 
pany, and  are  called  stockholders  or  shareholders.  Each 
stockholder  may  vote  annually  or  periodically  for  the  di- 
rectors of  the  company,  and  he  is  entitled  to  a  share  in 
the  profits  of  the  business,  in  the  form  of  dividends  on  his 


StObk  Investments  131 

stock,  when  such  dividends  are  declared  by  the  directors. 
Dividends  are  as  uncertain  to  the  stockholder  as  are  profits 
to  the  partner  in  a  partnership  organization.  Both  put 
their  money  into  the  business  without  guaranty  of  its 
return  or  assurance  of  receiving  any  regular  income  from  it. 

How  Stocks  Differ  from  Bonds.  When  you  buy  a  bond, 
you  lend  the  company  issuing  it  a  certain  sum  of  money 
upon  which  you  are  guaranteed  an  annual  rate  of  interest, 
with  a  return  of  the  principal  after  a  period  of  years ;  and 
you  are  secured  in  both  these  promises  by  title  to  property 
in  the  form  of  a  mortgage.  When  you  buy  stock  you  buy 
simply  an  interest  in  the  business ;  and  there  is  no  more 
guaranty  of  annual  income  or  of  ultimate  return  of  your 
principal  than  if,  with  one  or  more  other  persons,  you  form 
a  partnership  in  which  each  invests  a  certain  sum  of 
money.  The  amount  of  your  dividend  depends  entirely 
on  the  prosperity  of  the  enterprise.  Bond  debts  are  fixed 
charges  that  must  be  paid  with  interest;  but  dividends 
on  stocks  are  contingent  on  profits,  and  the  investments 
are  sunk  in  the  working  capital. 

Kinds  of  Stocks.  Unless  otherwise  designated,  all  stocks 
may  be  called  common,  although  this  description  is  entirely 
unnecessary  with  companies  that  issue  only  one  kind. 
Two  grades  of  stock  are  usually  offered,  one  taking  pre- 
cedence over  the  other  in  assets  and  dividends.  The  first 
is  said  to  be  preferred  stock,  and  the  second,  common  stock. 
Generally  speaking,  there  is  no  certainty  that  either  kind 
will  be  allotted  a  dividend ;  but  the  promise  is  that  the 
preferred  class  shall  receive  a  dividend  first,  if  there  are 
any  dividends  to  allot.  What  the  size  of  the  dividend 
shall  be  depends  on  the  vote  of  the  directors,  based  upon 
ihie  profits  of  the  year's  business.     In  some  companies  the 


132  Investments 

preferred  stock  is  entitled  to  a  certain  maximum  dividend, 
say  S%  ^^  ^Vc>  ^rid  the  common  stock  receives  what  is 
left.  In  very  prosperous  years,  this  may  exceed  the  divi- 
dend on  the  preferred  issue.  This  explains  why  the  com- 
mon stock  of  certain  companies  is  quoted  at  higher  prices 
than  the  preferred  stock.  In  order  to  prevent  this  con- 
tingency, it  is  sometimes  agreed  that  if  any  profits  are  left 
after  both  preferred  and  common  stockholders  have  re- 
ceived stipulated  dividends,  say  5  %  or  6  %,  the  remainder, 
or  a  certain  per  cent  of  it,  shall  go  to  the  preferred  class. 
Some  stocks  have  never  paid  a  dividend.  When,  how- 
ever, dividends  are  guaranteed  annually  on  stocks,  the  failure 
to  pay  in  any  one  year  constitutes  an  additional  dividend 
charge  that  accumulates  with  that  of  the  succeeding  year, 
and  the  stock  is  called  cumulative  preferred.  It  amounts 
to  an  obligation  to  pay  a  fixed  income  on  the  par  value  of 
such  stock.  In  their  regular  income  feature  stocks  are  like 
bonds,  but  their  security  rests  only  upon  the  earning  power 
and  the  credit  standing  of  the  company. 

Watered  Stocks.  Stocks  are  said  to  be  watered  when 
they  are  issued  to  persons  who  have  paid  no  actual  money 
for  them,  although  they  may  have  given  valuable  advice 
or  other  service.  Another  term  used  to  express  the  same 
process  is  overcapitalization;  that  is,  the  issuing  of  stock 
above  the  actual  amount  of  capital  invested.  In  the  cases 
of  many  large  industrial  companies  that  are  overcapitalized, 
the  preferred  stocks  represent  real  investment  and  the 
common  shares  "  water." 

•  Merits  of  Stocks.  The  merit  of  a  stock  as  a  real  invest- 
ment consists  (i)  in  the  character  and  the  business  record 
of  the  issuing  company ;  (2)  in  the  amount  and  the  regu- 
larity of  dividends  earned  ;  and  (3)  in  the  marketable  value 


stock  Investments  133 

of  the  security.  Considered  as  a  class,  stocks  do  not  fulfill 
the  main  requisites  of  an  investment,  —  security  of  princi- 
pal and  regularity  of  income.  As  stocks  are  not  secured 
and  have  no  guaranteed  dividend,  one  reason  for  buying 
them  is  generally  the  expectation  or  hope  of  selling  at  a 
higher  price,  which  amounts  to  speculation.  Bonds  as  a 
class  are  the  ideal  investment ;  stocks  as  a  class  are 
equally  ideal  for  speculation.  But  just  as  some  bonds 
have  speculative  value,  so  some  stocks  are  safe  investments. 

Stocks  of  Banks,  Trust  Companies,  etc.  Banks,  trust 
companies,  insurance  companies,  and  the  like  issue  stock 
that  may  generally  be  considered  safe  as  an  investment 
and  reasonably  good  as  an  income  producer.  Because  of 
the  large  dividends  paid  by  such  institutions,  there  is  a 
good  demand  for  their  stocks,  which  often  rise  to  such  a 
premium  that  the  actual  yield  to  the  investor  is  small. 
These  securities  do  not  usually  have  an  active  market, 
as  they  are  controlled  by  comparatively  few  people. 
They  can  be  purchased,  as  a  rule,  only  through  private 
sources. 

Railroad  Stocks.  The  railroads  generally  offer  greater 
opportunity  for  safe  stock  investment  than  any  other  kinds 
of  enterprises.  The  constant  expansion  of  the  railway  area 
and  the  increasing  amounts  of  capital  needed  for  exten- 
sions make  frec^uent  stock  issues  necessary  and  keep  the 
markets  supplied  with  a  type  of  security  which,  if  pur- 
chased with  discrimination,  offers  a  reasonably  safe  and 
lucrative  avenue  to  the  investing  public.  Some  of  the 
conditions  peculiar  to  railwa}'  ownership  and  management 
which  give  stability  to  their  stock  issues  are  :  (i)  the  sound 
business  foundations  underlying  raih-oads  ;  (2)  their  special 
l)rivileges  in  rights  of  way  and  terminals,  a  constantly  in- 


134  Investments 

creasing  asset ;  (3)  the  economy  of  their  management ;  and 
(4)  the  conservatism,  in  the  main,  of  their  capitalization. 

Other  Stocks.  Stocks  of  city  or  suburban  railways, 
known  as  tractions,  as  well  as  industrial  and  mining  stocks, 
are  less  safe  than  railroad  stocks  for  conservative  investors. 
Speculative  mining  stocks,  in  particular,  are  subject  to 
great  risks. 

QUESTIONS   AND   EXERCISES 

1.  Trace  the  development  of  a  business  organization  from 

the  individual  proprietor  to  the  corporation. 

2.  How  do  the  liabilities  of  the  ordinary  partner  differ 

from  those  of  a  shareholder  in  a  corporation? 

3.  What  real  and  artificial  causes  enter  into  a  change  in  the 

market  value  of  stocks? 

4.  Why  is  common  stock  better  adapted  to  speculation  than 

preferred  stock?  Under  what  conditions  may  com- 
mon stock  be  a  better  investment  than  preferred 
stock  ? 

5.  What  different  circumstances  affect  the  merits  of  stocks  - 

issued  by  railroads  and  industrial  concerns? 

XXVIII.   BOND   AND   STOCK  MARKET 

Buying  Stocks  and  Bonds.  In  selecting  a  good  invest- 
ment security,  the  knowledge  of  an  expert  in  business  enter- 
prises and  in  stock  and  bond  issues  is  just  as  important  as 
is  the  opinion  of  a  specialist  to  one  setting  out  to  buy  a 
house  or  a  motor  car.  The  prudent  purchaser  of  a  house 
would  enlist  the  services  of  a  real  estate  specialist,  the  careful 
buyer  of  a  motor  car  would  ask  the  advice  of  an  automobile 
expert.     So  the  investor  in  securities  shou'd  iput  bis  case 


Bond  and  Stock  Market  135 

in  the  hands  of  a  reputable  stockbroker  whose  business  it  is 
to  know  the  merits  of  securities. 

Inexperienced  people  often  intrust  the  investment  of 
their  funds  to  friends  or  to  relatives  and  even  permit  them 
to  hold  the  securities.  Convenience  and  momentary  econ- 
omy are  the  only  advantages  of  this  method ;  ultimate 
disaster  and  distress  are  likely  to  follow.  In  the  first  place, 
the  friend  or  the  relative  generally  is  not  a  specialist  in 
securities,  and  he  will  invest  the  funds  quite  as  inexpertly 
as  might  the  owner  himself ;  and  in  the  second  place,  with 
the  securities  in  his  hands  comes  the  temptation  to  manip- 
ulate them  in  various  ways,  which  may  so  involve  them 
that  loss  is  likely  to  follow.  The  only  safe  course  is  to 
select  a  reputable  stock  and  bond  broker,  and  leave  the 
case  in  his  hands. 

The  Stock  Exchange.  The  stock  exchange  is  an  associa- 
tion of  brokers  for  the  buying  and  selling  of  securities.  It 
has  as  its  legitimate  aim  the  providing  of  an  open  and 
regular  market  where  stock  companies  may  go  to  find 
buyers  for  their  stock  certificates  and  where  capitalists  or 
investors  may  go  to  select  securities  into  which  to  convert 
their  funds.  Each  one  of  our  principal  cities  has  its  stock 
exchange ;  but  the  original  and  authoritative  market  of 
the  United  States  is  the  New  York  Stock  Exchange,  where, 
in  prosperous  financial  seasons,  there  is  a  daily  average  sale 
of  eight  hundred  thousand  shares  of  stock  and  ten  million 
dollars  worth  of  bonds. 

It  must  not  be  understood  that  this  vast  business  is 
made  up  entirely  of  investment  sales.  A  large  part  of  the 
business  of  the  stock  exchange  is  purely  speculative ;  that 
is,  many  stocks  are  bought  or  sold  with  a  view  to  a  quick 
realization  of  profit.     Practically  all  such  transactions  arc 


136  Investments 

based  upon  marginal  operations,  the  buyer  or  the  seller 
putting  up  10%  or  more  of  the  price  involved,  dependent 
upon  the  reputation  or  character  of  the  stock.  The 
purchaser  of  the  stock  borrows  the  remainder  from  his 
broker,  expecting  to  realize  a  profit  by  selling  at  a  higher 
price  or  by  buying  at  a  lower  price,  before  his  margin  is 
wiped  out  by  price  fluctuations.  These  are  some  of  the 
evils  connected  with  the  stock  exchange.  This  perversion 
of  the  legitimate  function  of  the  stock  exchange  should 
not  blind  us  to  the  very  important  service  it  performs  for 
the  business  community. 

The  New  York  Stock  Exchange.  A  brief  description  of 
the  New  York  Stock  Exchange  will  furnish  a  general  idea 
of  the  character  and  the  methods  of  all  stock  markets. 
The  New  York  Stock  Exchange  is  an  unincorporated  asso- 
ciation of  1 100  members,  organized  for  "  the  purpose  of 
supplying  a  continuous  and  regulated  market  for  the  buying 
and  selling  of  stocks  and  bonds."  The  limited  membership, 
long  since  filled,  makes  places,  or  "  seats,"  as  they  are 
called,  very  valuable,  especially  in  times  of  large  business. 
The  profits  to  the  broker  member  consist  in  the  commissions 
he  receives  from  his  customers  in  executing  their  orders  on 
the  exchange.  At  the  rate  of  i%  for  either  buying  or  sell- 
ing, the  receipts  in  commissions  are  very  large  and  justify 
the  investment  of  a  considerable  capital  in  a  "  seat." 
During  the  past  ten  years  memberships  have  been  sold  at 
from  $50,000  to  $95,000. 

Investors  do  not  have  direct  access  to  the  exchange  floor, 
but  leave  their  orders  in  the  offices  of  broker  members,  who, 
the  same  day,  or  the  day  following,  execute  them  at  the 
exchange.  The  results  of  such  transactions  can  be  immedi- 
ately communicated,  over  the  telephone,  by  the  broker  in 


Bond  and  Stock  Market  137 

the  exchange  to  the  customer  in  the  broker's  office.  'Die 
exchange  is  open  on  business  days  between  ten  and  three, 
except  on  Saturdays,  when  the  closing  hour  is  twelve. 
The  exchange  is  officially  opened  and  closed  by  a  chair- 
man, whose  further  business  it  is  to  preserve  order  and 
to  make  all  necessary  announcements. 

About  the  trading  room  are  posts  bearing  placards  on 
which  are  printed  names  of  stocks,  and  around  these  posts 
the  brokers  group  themselves  according  to  their  commis- 
sions in  the  various  securities  specified. 

As  soon  as  a  purchase  or  a  sale  is  completed,  memoran- 
dums of  the  transaction  are  made  by  the  contracting 
brokers,  and  a  copy  is  given  to  a  waiting  page  who  carries 
it  quickly  to  the  secretary  of  the  exchange.  The  secretary 
notes  the  transaction  on  his  book  of  record.  He  then 
directs  a  clerk  to  have  it  recorded  on  the  price  board 
and  to  transmit  it  by  telegraph  to  other  exchanges,  and  to 
customers  of  the  exchange  who  have  contracted  to  receive 
regularly  through  the  so-called  stock-indicator  or  ticker  a 
complete  record  of  each  transaction  made.  By  these  means 
the  public  is  apprised  of  the  last  quotation  on  any  stock, 
and  those  desiring  to  buy  or  to  sell  are  guided  accordingly. 
These  tickers  are  to  be  found  in  brokers'  offices  generally 
and  in  certain  public  places,  like  hotels.  Quotations  of 
the  market  values  of  stocks  and  bonds,  which  vary  from 
day  to  day,  may  be  found  in  the  daily  newspapers. 

Other  Avenues  of  Purchase.  Besides  the  stock  exchange, 
the  securities  market  includes  what  is  called  the  curb, 
the  auction  block,  and  the  many  less  public  and  more 
personal  methods  of  bringing  together  the  two  parties  to 
stock  or  bond  investments.  Not  all  stocks  and  bonds  can 
be  purchased  at  the  regular  exchanges,  but  only  those  of 


138  Investments 

companies  whose  officers  are  willing  to  comply  with  the 
rules  of  the  exchanges  as  to  stock  lists.  Such  restrictions 
have  operated  to  keep  out  of  the  official  exchanges 
certain  good  stocks  that  are  offered  publicly  at  the  outside 
or  unofficial  curb  market,  so  called  because  the  brokers  have 
often  met  on  the  sidewalks.  Also  there  are  certain  stocks 
that  are  never  active  and  hence  are  not  suitable  for  Hsting 
on  a  regular  exchange.  These  ffiid  new  buyers  only  over 
auction  blocks,  places  where  at  stated  times  during  the 
week  securities  of  all  kinds  are  auctioned  off  to  the  highest 
bidders.  The  safe  guidance  of  a  reliable  broker  is  espe- 
cially important  in  the  purchase  of  such  stocks. 

Many  private  and  personal  sources  may  be  Used  to  con- 
vert funds  into  securities,  especially  bonds.  Possibly  the 
largest  of  these  is  the  field  of  private  banking.  One  of  the 
chief  sources  of  profit  to  our  great  private  banks  is  the 
underwriting  of  securities  that  are  issued  by  corporations. 
To  underwrite  is  to  issue  and  to  be  responsible  for.  For 
instance,  if  the  Universal  Metal  Corporation  should  wish 
to  raise  $10,000,000  additional  capital  by  bond  issue,  it 
might  place  the  mortgage  security  required  in  the  hands  of 
Dwyer  and  Company,  private  bankers,  who  would  seU  the 
bonds  to  the  public  and  themselves  agree  to  pay  for  every 
bond  not  sold.  For  this  service  they  would  receive  a  com- 
mission. 

Trust  companies,  financing  as  they  do  extensive  build- 
ing operations,  offer  a  type  of  mortgage  bond  that  is 
at  once  sound  and  remunerative.  Lawyers,  too,  in  caring 
for  large  estates  are  in  a  position  to  steer  the  investor  into 
safe  channels.  No  matter  what  the  ultimate  medium  of 
purchase  may  be,  the  general  direction  to  seek  the  ad\dce 
of  an  experienced  securities  broker  should  be  followed. 


Mortgage  and  Real  Estate  Investments         139 

QUESTIONS   AND   EXERCISES 

1.  What  advantage  accrues  to  a  municipality  which  issues 

bonds   in   small   denominations   and   markets    them 
itself? 

2.  What  is  meant  by  the  "  bull  movement  "  in  the  stock 

market?  the  "  bear  movement  "?  a  "  lamb  "? 

3 .  What  advantage  accrues  to  a  company  in  having  its  stock 

listed  on  the  stock  exchange? 

4.  Why  is  the  stock  exchange  more  necessary  now  than  it 

was  fifty  years  ago  ? 

5.  Is  there  any  difference  between  buying  stocks  on  margin 

and  buying  wheat  on  margin  ? 

XXIX.    MORTGAGE   AND   REAL   ESTATE 
INVESTMENTS 

Mortgages.  As  already  explained,  the  mortgage  is  a 
written  instrument  representing  a  claim  on  land  or  buildings 
against  which  the  owner  has  borrowed  money  for  a  stated 
term  of  years.  The  borrower  agrees  to  pay  interest  at  a 
rate  based  on  the  risk  assumed  and  on  the  abundance  or 
scarcity  of  money  seeking  investment.  The  average  rate 
is  between  5  %  and  6  %. 

The  distinguishing  feature  of  a  mortgage  as  compared  to 
a  bond  is  that  the  holder  of  the  mortgage  can  never  realize 
on  his  claim  more  than  his  mortgage  calls  for,  since  he 
has  lent  a  definite  amount  of  money  for  a  given  period  at 
a  stipulated  rate  of  interest.  The  bondholder,  though  he, 
likewise  has  lent  his  money  for  a  given  period  at  a  fixed 
rate  of  interest,  may  sell  at  a  premium  or  at  a  loss  because 
of  the  fluctuations  in  bond  values  due  to  active  trading  in 
such  securities  on  the  exchanges.    There  is  no  open  market 


I40  Investments 

for  mortgages  and  they  are  costly  to  transfer,  hence  traf- 
ficking in  them  is  reduced  to  a  minimum.  This  handicap 
of  mortgages  is  offset  by  larger  income  and  correspondingly 
greater  security,  the  two  indispensable  elements  in  every 
perfect  investment.  The  only  advantage  that  a  well- 
secured  bond  has  over  a  mortgage  is  the  longer  term  of 
the  loan,  although  as  a  matter  of  fact  most  mortgages, 
while  written  for  a  relatively  short  time,  three  or  five 
years,  are  by  common  consent  allowed  to  extend  them- 
selves indefinitely.  Mortgages,  therefore,  seem  to  fulfill 
completely  the  requirements  of  a  stable  and  profitable 
investment. 

A  mortgage  on  land  is  better  than  one  on  a  building, 
as  the  value  thus  mortgaged  is  at  all  times  inherent  in 
the  land,  whereas  much  of  the  value  of  a  building  is  de- 
pendent on  the  nature  and  the  extent  of  the  use  made  of 
it.  For  instance,  a  mortgage  on  an  office  building,  based 
mainly  on  building  value,  depends  for  its  stability  too  much 
on  whether  the  building  is  profitably  tenanted,  a  commer- 
cial uncertainty  that  should  be  eliminated  as  much  as 
possible  in  mortgage  securities.  Good  city  or  farm  lands 
retain  their  value  irrespective  of  the  buildings  occupying 
them,  and  increase  in  value,  thus  adding  security  to  mort- 
gages attached  to  them.  The  investor  can  find  no  better 
or  safer  investment  of  his  money  than  a  first  mortgage  on 
land  accepted  for  not  more  than  60%  of  its  value.  In 
support  of  this  opinion  may  be  mentioned  the  fact  that 
the  state  of  New  York  permits  savings  banks  to  invest 
65  %  of  their  funds  in  real  estate  mortgages. 

There  may  be  second  mortgages  or  subsequent  mortgages 
on  a  piece  of  property.  In  case  of  foreclosure  these  are 
paid  in  the  order  of  their  date ;  that  is,  the  first  mortgage 


Mortgage  and  Real  Estate  Investments         141 

must  be  paid  in  full  before  anything  is  paid  on  the  second 
mortgage.  Second  mortgages  have  merit  in  proportion  to 
the  value  that  the  prior  lien  has  in  relation  to  the  full 
value  of  the  property  mortgaged.  Because  of  the  subor- 
dinate relation  of  the  second  mortgage  and  the  greater 
risks  surrounding  it,  it  yields  a  higher  rate  of  interest.  A 
borrower  getting  first  mortgage  money  at  5  %  will  generally 
have  to  pay  6  %  for  a  second  mortgage. 

Real  Estate.  In  considering  real  estate  as  an  investment 
field,  we  shall  divide  it  into  (i)  improved  real  estate,  prop- 
erty on  which  something  is  built ;  and  (2)  unimproved 
property,  land  without  anything  built  on  it.  As  we  are 
endeavoring  to  guide  the  average  citizen  in  this  investment 
process,  we  may  at  once  dismiss  the  subject  of  unimproved 
property  as  a  field  too  speculative  in  character  and  as  a 
business  proposition  too  slow  of  development  to  suit  the 
purpose.  Real  estate,  to  be  worthy  of  consideration,  should 
be  improved  and  should  represent  a  growing  enterprise. 
Even  under  such  conditions  the  element  of  risk  cannot  be 
eliminated,  since  all  such  property  depends  for  its  value  on 
profitable  occupancy.  If  it  is  'a  farm  property,  the  income 
to  the  owner  grows  out  of  his  tenant's  successful  tilling  of 
the  soil,  raising  of  stock,  etc. ;  if  it  is  a  business  or  residence 
property,  income  depends  on  a  good  tenant  with  rentals 
adequate  to  leave  a  fair  interest  on  the  investment  after  all 
taxes  and  other  fixed  charges  are  paid. 

Real  estate  is  a  field  of  investment  offering  opportunities 
for  fair  income  and  large  profits  to  men  of  large  capital, 
who  by  investing  in  a  number  of  properties  have  a  chance 
to  earn  a  good  average  income  even  though  some  of  the 
properties  are  unproductive.  The  purchase  of  property, 
especially  residences,  even  though  cheap  and  promising  a 


142  Investments 

high  per  cent  of  income,  is  not  to  be  recommended  to  small 
investors.  The  annoying  circumstances  attending  the  rent- 
ing of  such  property,  the  uncertainty  of  getting  and  keep- 
ing a  good  tenant,  the  generally  declining  values — all  tend 
to  make  the  ownership  of  such  property  a  burden  ;  and  the 
owner  often  disposes  of  such  investments  at  a  loss,  in  his 
anxiety  to  relieve  himself  of  the  annoyance.  An  invest- 
ment that  gives  constant  anxiety  to  the  owner  is  not  de- 
sirable. Real  estate  for  the  small  buyer  possesses  these 
faults,  and  should  not  be  purchased  when  good  mortgages 
and  bond  securities  are  available. 

How  to  Purchase  Mortgages  and  Real  Estate.  There  is 
no  open  and  continuous  market  for  the  purchase  and  sale 
of  real  estate  and  mortgages  as  there  is  for  stocks  and 
bonds.  Real  estate  exchanges  in  this  sense  do  not  as  yet 
exist.  Transactions  in  real  property  and  in  mortgages  are 
relatively  so  few  as  not  to  promise  an  adequate  basis  for  a 
regular  daily  market ;  hence  all  purchases,  except  occasional 
auction  sales,  must  be  made  privately.  If  we  contemplate 
buying  a  house,  we  should  go  to  a  real  estate  broker.  He 
will  act  in  the  same  professional  capacity  for  his  commis- 
sion of  I  %  or  2  %  as  the  stock  broker  does  for  his  com- 
mission of  1%.  The  realty  broker  in  addition  handles 
mortgages,  insurance  policies,  and  other  instruments  inci- 
dent to  property  transactions.  Lawyers  likewise  make  it 
part  of  their  business  to  place  mortgages ;  that  is,  to  find 
buyers.  The  newest  and  possibly  laYgest  agency  for  this 
business  is  the  trust  company,  whose  real  estate  depart- 
ment can  offer  to  the  money  lender  mortgages  of  many  kinds 
and  amounts.  In  many  respects  this  agency  offers  to  the  in- 
vestor in  mortgages  and  real  estate  an  avenue  of  purchase 
that  is  generally  marked  by  both  convenience  and  safety: 


Mortgage  and  Real  Estate  Investments         143 

QUESTIONS   AND    EXERCISES 

In  the  purchase  of  a  mortgage,  what  should  you  know 
about  the  property  involved  ? 

If  the  interest  on  a  mortgage  is  not  paid,  what  steps 
must  be  taken  by  the  holder  to  safeguard  his  invest- 
ment? 

In  considering  the  question  of  investing  in  real  estate, 
should  you  prefer  to  buy  in  the  central  business 
district  of  a  city,  in  the  suburbs,  or  in  a  farming 
community?     Give  reasons. 

What  efifect  does  a  line  of  transportation  have  upon 
adjacent  property  values  ?     Why  ? 

In  investing  in  real  estate,  should  you  prefer  to  employ 
a  trust  company  or  an  individual  real  estate  broker  to 
attend  to  the  business  of  transfer  ?     Why  ? 


PART   VI 

LETTER  WRITING 

XXX.   BUSINESS   LETTERS 

Kinds  of  Letters.  The  field  of  letter  writing  embraces  (i) 
friendship  letters;  (2)  social  letters,  including  invitations, 
acceptances,  letters  of  congratulation,  of  condolence,  of 
introduction,  etc. ;  (3)  business  letters ;  and  (4)  public 
letters,  addressed  to  a  public  official  or  other  person  through 
the  newspapers  or  some  other  form  of  public  print. 

Business  Letters.  The  purpose  of  this  chapter  is  to 
present  the  essentials  of  business  correspondence.  In  doing 
this  we  shall  incidentally  consider  the  important  elements 
of  other  kinds  of  correspondence  as  well.  Good  business 
letters  largely  constitute  the  basis  of  good  business 
practice ;  and  nearly  every  one,  at  some  time  or  other,  has 
incidental  business  relations  with  some  one  else,  the  suc- 
cessful conduct  of  which  necessitates  a  knowledge  of  letter 
forms  acceptable  to  the  business  community. 

Points  to  Be  Observed,  (i)  Be  sure  that  you  have 
something  worth  writing  about. 

(2)  Before  beginning  to  write,  have  a  clear  idea  of  what 
to  say  and  how  to  say  it. 

(3)  Write  concisely,  completely,  and  briefly. 

(4)  Make  sure  that  your  letter  is  correct  in  form  and 
neat  in  appearance. 

144 


Business  Letters  145 

These  precautions  are  all  of  the  greatest  importance. 
First,  many  a  person  compromises  himself  by  writing  a 
superfluous  letter  or  suffers  a  disadvantage  by  writmg  at 
an  ill-chosen  time.  Second,  a  clear  mental  outline  of  the 
letter  will  result  in  a  logical  presentation  of  facts,  and  will 
protect  the  writer  against  loss  of  time  occasioned  by  the 
necessity  of  rewriting  the  letter  or  a  part  of  it  several  times. 
Third,  the  principal  merit  of  a  business  letter  is  brevity 
with  completeness  of  statement,  and  this  cannot  be  secured 
unless  the  writer  is  direct  and  concise  in  expression.  Fourth, 
a  letter  that  lacks  neatness  and  correctness  is  a  discredit 
to  the  sender  and  a  discourtesy  to  the  recipient. 

Parts  of  a  Letter.  A  letter  may  be  divided  into  six  main 
parts,  as  follows : 

1.  Heading.  4.    Body. 

2.  Inside  address.  5.    Complimentary  close. 

3.  Salutation.  6.   Signature. 

Skeleton  Letter   Form 


(Heading) . 
(Inside  address) 


(Salutation) 

(Body  of  Letter) 


(Complimentary  close)  ■ 
(Signature) 


EL.  or  BUS.  —  10 


146  Letter  Writing 

Heading.  Standard  business  practice  places  the  heading 
in  the  upper  right-hand  corner  of  the  sheet,  as  shown  in  the 
form  on  page  145.  It  should  be  complete,  containing  in 
the  case  of  large  cities  the  street  and  the  number,  and  in 
the  case  of  small  towns  the  county  of  the  state.  Business 
letterheads  provide  these  headings  in  print,  with  a  blank 
line  for  filling  in  the  date. 

The  following  are  acceptable  forms  of  headings: 

Headings 


Elmlra.   N.   Y. ,   Jan,    10,   1918 


625  Polsom  Street 

San  Francisco,  Calif. 
July  1,  1918 


Hew  Bedford,  Lawrence  Co.,  Pa. 
sept.  2,  1918 


Harvard  University 

Cambridge,  Itoes. 

Dec.  14.  1918 


There  is  a  growing  tendency  to  omit  the  punctuation 
marks  at  the  ends  of  the  heading  lines,  except  where  the 
line  ends  in  an  abbreviation.  Note  that  the  abbreviations 
"th,"  ''st,"and  "d"  are  not  used  with  the  date  in  headings; 
"  nd"  and  "  rd  "  are  obsolete  in  all  cases. 


Business  Letters  147 

Inside  Address.  The  inside  address  is  placed  on  the 
left-hand  margin  line,  about  an  inch  below  the  date  line. 
It  consists  of  the  name  of  the  person,  the  firm,  or  the  insti- 
tution written  to,  together  with  the  name  of  the  city  or  the 

iNsroE  Addresses  and  Salutations 


Messrs.  Kline,  Barber,  and  Company 
1150  Broadway 
New  York,  U.  Y. 

Gentlemen: 


Miss  Katherine  Wells 

450  Gay  Street 

Knoxville,  Tenn. 

Dear  Miss  Wells: 


Western  Lumber  Company 

Seattle,  Wash. 
Gentlemen: 


Prof.  Arthur  A.  Fiske 
Yale  University 
New  Haven,  Conn. 

Dear  Mr.  Fiske: 


Mr.  Samuel  Stone 

Bethel,  Maine 
Dear  Sir: 


town  and  the  state  of  residence.  It  may  occupy  two  or 
three  lines.  It  is  not  always  necessary  to  include  the 
street  number  or  the  county.  In  addressing  men,  the  com- 
mon title  "  Mr."  is  always  appropriate.     Instead  of  this 


148  Letter  Writing 

title,  "  Esq."  may  be  appended  to  the  name  of  lawyers  and 
those  occupying  pubh'r  positions.  It  is  wrong  to  use  both 
these  titles  with  the  same  name,  or  two  like  titles  of  any 
kind.  A  physician  may  be  addressed  either  as  Dr.  John 
Spencer  or  John  Spencer,  M.D.,  but  not  as  Dr.  John 
Spencer,  M.D. ;  Rev.  John  Fisher,  D.D.  and  Prof.  Frank 
Patton,  LL.D.  are  permissible,  because  the  two  titles  in 
each  instance  are  of  different  significance.  "  Messrs.,"  the 
abbreviation  for  the  French  "  messieurs,"  applies  to  two  or 
more  men  or  to  business  firms.  "  Honorable  "  or  "  Hon." 
is  appropriate  when  addressing  men  in  high  public  office. 
Use  "Miss"  or  "Mrs."  in  addressing  a  woman,  and 
"  Misses  "  or  "  Mesdames  "  in  addressing  more  than  one 
woman. 

Salutation.  The  style  of  salutation  to  be  employed 
depends  on  one's  relation  to  the  person  or  persons  ad- 
dressed, and  on  the  nature  of  the  communication  itself. 
Standard  styles  in  business  are  as  follows: 

Dear  Sir  :  Dear  Madam : 

My  dear  Sir:  My  dear  Madam: 

Sir :  Ladies : 

Dear  Mr. :  Mesdames: 

My  dear  Mr. :  Dear  Miss : 

Gentlemen :  My  dear  Miss : 

Dear  Sirs:  Dear  Mrs. ■: 


Sirs :  My  dear  Mrs.  — ' — : 

"  Sirs  "  and  "  Sir  "  apply  to  communications  of  a  more 

formal  character.     "Dear  Mr.— — ,"  "Dear  Miss ," 

"  Dear  Mrs. ,"  and  "  My  dear  Mr. ,"  "  My  dear 

Miss ,"   "  My  dear  Mrs.  "  are  less  formal  and 

should  be  used  in  personal  correspondence  and  in  letters  of 
an  incidental  business  nature.    "Dear  Madam"  is  proper  as 


Business  Letters  149 

a  salutation  for  either  a  married  or  a  single  woman.  The 
salutation  of  a  business  letter  is  usually  followed  by  a  colon. 

Note  the  forms  on  page  147  for  address  and  salutation. 
The  first  form  is  finding  favor  ,for  t3^ewritten  letters  be- 
cause it  facilitates  operation.  The  commas  are  frequently 
omitted  after  the  address  lines. 

Body  of  the  Letter.  The  body  of  the  letter  is  the  com- 
munication proper,  and  may  begin  on  the  line  below  the 
salutation,  about  an  inch  to  the  right  of  the  margin.  Leave 
generous  margins  on  all  sides,  as  crowding  spoils  the  ap- 
pearance of  the  letter.  Paragraph  only  when  you  change 
from  one  subject  to  another,  or  when  you  wish  to  give 
emphasis  to  important  subdivisions  of  a  given  subject. 
Paragraphing  merely  for  the  sake  of  appearance  is  not 
justifiable.  Every  new  paragraph  should  begin  directly 
under  the  first  word  of  the  body  of  the  letter. 

Do  not  overpunctuate ;  punctuate  just  enough  to  make 
the  construction  clear.  Until  you  acquire  by  experience 
the  punctuation  sense,  as  apart  from  grammatical  rules, 
you  can  get  on  pretty  well  with  the  comma,  the  period,  and 
the  interrogation  mark,  with  very  occasional  use  of  the 
colon  and  the  dash.  The  semicolon  is  a  troublesome  mark. 
When  the  young  writer  feels  the  possible  need  of  it,  he  is 
safer  in  using  the  period.  This  will  have  a  tendency  to 
keep  the  sentences  short,  —  a  desirable  feature  in  writing. 

Do  not  overcapitalize.  The  tendency  to-day  is  away 
from  meaningless  capitals,  which  only  mar  the  page  and 
somewhat  confuse  the  eye  in  reading.  Besides,  in  type- 
setting and  in  typewriting,  considerable  time  and  labor 
are  saved  by  avoiding  capital  letters  and  all  "  upper  case  " 
marks  as  much  as  possible.  Even  the  words  "  street  " 
and  "  avenue  "  in  such  expressions  as  "  Market  street  "  or 


I50  Letter  Writing 

"  Park  avenue  "  are  now  frequently  written  without  capi- 
tals. 

The  abbreviations  "  inst.,"  for  "instant"  (the  present 
month) ;  "  ult.,"  "  ultimo  "  (the  last  month),  and  "  prox.," 
for  "  proximo  "  (the  next  month)  are  falling  into  disuse. 
"  ist,"  "  3d,"  "  5th,"  etc.,  are  not  abbreviations  and 
should  not  be  followed  by  a  period.  Do  not  use  these 
forms  unless  they  precede  the  month.  "  Your  letter  of  the 
25th  of  April  is  received,"  and  ''  Your  letter  of  April  25  is 
received,"  represent  the  best  business  practice.  The  names 
of  cities  should  never  be  abbreviated  ;  there  are  no  author- 
ized abbreviations  for  cities.  Names  of  states  should  not 
be  abbreviated  unless  preceded  by  the  name  of  a  town  or 
of  a  city. 

Complimentary  Close.  The  terms  in  which  a  letter 
should  be  closed  should  be  in  harmony  with  the  salutation, 
as  both  are  selected  with  reference  to  the  relations  existing 
between  the  correspondents.  The  more  formal  letters  of 
business  which  open  with  "  Dear  Sir,"  "  Gentlemen,"  etc., 
should  close  with  "  Yours  truly,"  "  Very  truly  yours,"  or 
"  Respectfully  yours."  "  Cordially  yours,"  "  Sincerely 
yours,"  and  the  like,  are  proper  for  less  formal  communica- 
tions. In  the  complimentary  close,  note  that  only  the  first 
word  is  capitalized. 

Signature.  The  most  important  thing  to  say  about  the 
signature  is  that  it  should  be  written  so  that  it  can  be  read. 
The  courtesy  of  a  readable  signature  is  due  to  every  person 
addressed,  especially  if  an  answer  is  expected.  A  woman's 
signature  should  clearl)-  show  thai  it  is  the  signature  of  a 
woman,  and  this  requires  that  the  first  name  be  written 
in  full  or  that  "Miss"  or  "Mrs."  be  added  in  paren- 
thesis.    A  married  woman  should  sign  her  own  first  name, 


Business  Letters  151 

but  should  at  the  same  time  indicate  her  married  state 
and  suggest  the  manner  in  which  she  should  be  addressed 
in  reply,  by  writing  in  parenthesis  her  husband's  first  name 
or  initials.  Thus,  Mrs.  William  D.  Forman,  whose  given 
name  is  Anna  L.,  should  sign  "  Anna  L.  Forman  (Mrs. 
W.  D.)."  When  signing  for  another,  write  your  own  name 
or  initials  in  smaller  script  immediately  under  the  principal 
signature. 

The  initials  of  the  person  who  dictates  a  letter  and  the 
one  who  typewrites  it  are  often  placed  at  the  left-hand 
margin. 

Study  the  following  letter  as  a  model  in  which  all  parts 
are  brought  into  proper  relationship. 


15  State  Street 
Toledo,  Ohio 
July  12,  1918 

Mr.  Charles  0.  Stimaon 
84  Boylston  Street 
Boston,  Mass. 

Dear  Sir: 

During  my  recent  visit  to  your  city  I 
had  the  pleasure  of  an  interview  with  you,  in  the 
course  of  which  you  expressed  a  desire  to  inspect 
my  goods  with  a  view  to  placing  a  stock  of  them 
on  sale  in  your  store.   In  order  to  facilitate 
this  end,  I  take  pleasure  in  sending  you  to-day, 
ty  express, a  package  containing  samples  of  a  new 
line  of  wall  paper  Just  ready  for  the  market. 

I  trust  that  you  will  be  sufficiently 
impressed  with  these  samples  to  place  with  me 
a  trial  order,  as  I  feel  confident  that  the  de- 
mand for  these  goods  will  Justify  your  decision. 

Yours  truly. 


152  Letter  Writing 

Paper.  Business  letters  should  be  written  on  business 
styles  of  paper.  These  commonly  consist  of  two  sizes,  the 
larger  approximately  8|"  X  ii",  being  called  letter  size; 
and  the  smaller,  which  varies  in  dimensions  and  shape,  note 
size. 

Folding.  The  letter-size  sheet  should  be  folded  by  bring- 
ing the  bottom  edge  up  and  laying  it  evenly  along  the  top 
edge,  or  within  a  half  inch  of  it,  then  turning  the  right 
edge  to  the  middle  and  laying  the  left  third  over  it.  The 
note-size  sheet  requires  two  folds  only.  Insert  the  sheet 
in  the  envelope  so  that  the  open  parts  of  the  folds  are 
toward  the  back  and  the  top. 

XXXI.   ADDRESSING   ENVELOPES 

Envelope  Address.  The  addressing  of  the  envelope 
admits  of  considerable  variation,   but  some  features  are 


/&Si»«.    -to 


invariable.  Write  clearly,  as  the  postal  officials  must  work 
quickly  and  accurately.  Avoid  the  doubling  up  of  titles 
and  the  writing  of  anything  superfluous  on  the  envelope. 
Titles  are  sometimes  omitted  entirely,  as  in  the  envelope 
on  page  153  addressed  to  "  Win  ton  and  Baxter." 


Addressing  Envelopes  153 

The  abbreviation  of  certain  states  may  easily  be  confused 
when  written  with  a  pen.  ''  Pa."  and  "  Va.,"  "  N.  Y." 
and  "  N.  J.,"  "  Me."  and  ''  Mo.,"  are  causing  much  annoy- 
ance to  postal  officials.     It  is  better  to  write  the  name  of 


After  10  days  relu 
T.  J.  Lord 
6  Julia  Street 
Hew  Orleana,  I<a 

rn  to 

WISTON 

AHD  BAXTER 
PORTLAND 

56  Flint  Street 

OREOON 

the  state  m  full,  especially  in  cases  where  confusion  is 
possible.  Always  write  the  name  or  the  abbreviation  of  the 
state  on  a  line  by  itself,  or  clear  of  anything  else  on  the  same 
line.     The  style   shown  in  the  model  on  page    154  is  a 


Return  to 

Edith  V.  Powers 
Walthao.  Minn. 

MR. 

COmiELIUS  V.  HARPER  ■ 

1420  Tennessee  Street 

MEMPHIS 

TETWESSEE 

pleasing  innovation,  and  has  much  in  its  favor  as  a  time 
saver  both  to  the  typist  and  to  the  postal  clerk  —  to  the 
former,  because  of  the  uniformity  in  the  starting  point ; 
and  to  the  latter,  because  of  orderliness  in  arrangement. 


154  Letter  Writing 

All  envelopes,  but  most  imperatively  business  envelopes, 
should  contain  the  address  of  the  sender  in  the  upper  bft- 
hand  corner. 

The  stamp  should  be  placed  in  the  upper  right-hand 
corner. 


From  A.  0.  Marlln 

Lincoln,  Vermont  (Stamp) 


Alden  Boat  Manufacturing  Company 

153  Canal  Street 

Bangor 

Ualne 


Postal  Information.  Although  full  information  as  to 
postal  rates  is  available  at  any  post  office,  it  is  well  to  include 
here  the  common  mailing  regulations.  Domestic  mail  is 
di^^ded  into  four  general  classes  as  follows : 

First-class  matter  includes  written  matter;  namely: 
letters,  United  States  postal  cards,  post  cards  (private 
mailing  cards),  and  all  matter  wholly  or  partly  in  writing 
except  manuscript  copy  accompanying  proof  sheets.  The 
limit  of  weight  is  70  pounds  for  distances  up  to  300  miles 
and  50  pounds  for  greater  distances. 

The  rates  of  first-class  matter  are : 

(i)  On  letters  and  other  matter  wholly  or  partly  in 
writing,  3^  an  ounce  or  fraction  thereof. 

(2)  On  drop  letters,  that  is,  letters  addressed  for  delivery 
from  the  post  office  from  which  they  are  posted,  2^  an  ounce 
or  fraction  thereof. 


Addressing  Envelopes  155 

(3)  On  United  States  postal  cards  and  private  mailing 
cards,  2^  each. 

Second-class  matter  includes  newspapers  and  periodicals 
bearing  notice  of  entry  as  second-class  matter.  No  limit 
of  weight  is  prescribed. 

The  rate  of  postage  on  newspapers  and  periodicals  of 
the  second  class  when  sent  unsealed  by  the  public  is  i^ 
for  each  4  ounces  or  fraction  thereof. 

Third-class  matter  includes  circulars,  newspapers,  and 
periodicals  not  admitted  to  the  second  class  nor  embraced 
in  the  term  "  book,"  miscellaneous  printed  matter  on  paper 
not  having  the  nature  of  an  actual  personal  correspondence, 
corrected  proof  sheets,  and  manuscript  copy  accompany- 
ing the  same,  and  matter  in  point  print  or  raised  characters 
used  by  the  blind.     The  limit  of  weight  is  4  pounds. 

The  rate  of  postage  on  unsealed  third-class  matter  is 
I  f!^  for  each  2  ounces  or  fraction  thereof. 

Fourth-class  matter  embraces  that  known  as  domestic 
parcel  post  mail  and  includes  merchandise,  farm  and 
factory  products,  seeds,  plants,  etc.,  books,  miscellaneous 
printed  matter  weighing  more  than  4  pounds,  and  all  other 
mailable  matter  not  embraced  in  the  first,  second,  and 
third  classes.  The  limit  of  weight  for  parcels  in  the  first 
three  zones  is  70  pounds  and  for  all  others  50  pounds. 

Rates  of  postage  on  fourth-class  or  parcel  post  matter  — 
to  be  fully  prepaid,  unsealed  —  are  as  follows : 

(i)  Parcels  weighing  4  ounces  or  less,  except  books,  seeds, 
plants,  etc.,  i^  for  each  ounce  or  fraction  thereof,  any 
distance. 

(2)  Parcels  weighing  8  ounces  or  less  containing  books, 
seeds,  plants,  etc.,  i^  for  each  2  ounces  or  fraction  thereof, 
regardless  of  distance. 


156 


Letter  Writing 


(3)  Parcels  weighing  more  than  8  ounces  containing 
books,  seeds,  plants,  etc.,  parcels  of  miscellaneous  printed 
matter  weighing  more  than  4  pounds,  and  all  other  parcels 
of  fourth-class  matter  weighing  more  than  4  ounces  are 
chargeable  according  to  distance  or  zone  at  the  pound  rates 
shown  in  the  following  table,  a  fraction  of  a  pound  being 
computed  as  a  full  pound. 


First  Pound 

Each  Extra 
Pound 

Local  Rate  ($i  for  first  pound  and  icf  for 

each  additional  two  pounds  or  frac- 

tion thereof). 

ist  zone  —  I  to  50  miles    .... 

$.05 

$.01 

2d  zone  —  50  to  150  miles 

•05 

.01 

3d  zone  —  150  to  300  miles   . 

.06 

.02 

4th  zone  —  300  to  600  miles   . 

.07 

.04 

5th  zone  —  600  to  1000  miles 

.08 

.06 

6th  zone  —  1000  to  1400  miles 

.09 

.08 

7th  zone  —  1400  to  1800  miles 

.11 

.10 

8th  zone  —  over  1800  miles     . 

.12 

.12 

In  addition,  parcels  on  which  the  postage  amounts  to  25^ 
or  more  are  subject  to  a  tax  of  i^  for  each  25^  or  fractional 
part  thereof. 


XXXII.  SPECIAL  FORMS  OF  LETTERS  AND 
TELEGRAMS 

Letters  of  Introduction  and  Recommendation.  Letters 
are  occasionally  used  in  business  to  introduce  or  to  recom- 
mend a  person.  As  a  rule  a  business  man  is  not  inclined 
to  give  a  letter  of  introduction  unless  at  the  same  time 


special  Forms  of  Letters  and  Telegrams       157 

he  is  willing  to  add  a  word  of  recommendation.  Such 
letters  should  be  very  sparingly  given,  and  only  to  those 
persons  whom  the  writer  is  ready  to  vouch  for.  They 
should  be  brief  and  should  contain  nothing  but  the  element 
of  introduction  or  recommendation  or  both.  Letters  of 
introduction  are  always  addressed  to  some  particular  per- 
son or  firm,  as  shown  below.     Letters  of  recommendation 

Letter  of  Introduction 


New  Orleans,  La.,  March  9,  1918 

Mr.  Ellas  M.  Munson 

Louiaville,  Kentucky 
Dear  Sir: 

It  Klves  me  unusual  pleasure  to  introduce 
to  you  my  business  acquaintance  and  friend,  Mr.  Leroy 
Stanley,  who  purposea  spending  several  days  in  your 
city  with  a  view  to  establishing  business  relations 
With  certain  Louisville  houses.  Whatever  personal 
courtesy  or  business  consideration  you  may  feel  in- 
clined to  extend  to  him  will  be  greatly  appreciated 
by  me  as  well  as  by  Mr.  Stanley. 

Yours  very  sincerely, 


^~VfLaM:^<'>^ '-y-^^ 


may  be  likewise  specific,  but  frequently  are  general  and 
open  in  address,  as  shown  in  the  form  on  page  158. 


158  Letter  Writing 

Letter  of  Recommendation 


Richmond,  Va.,  January  21,  1916 


To  whom  It  may  concern: 

This  18  to  certify  that  the  bearer. 
Miss  Jennie  Courtney,  has  been  a  bookkeeper  in  our 
service  for  the  past  three  years.   A  reorganization 
of  our  business,  which  involves  a  reduction  in  our 
office  force,  is  the  sole  cause  for  dispensing  with 
Miss  Courtney's  valuable  services.   In  addition  to 
certifying  to  her  efficiency  as  an  accountant,  we 
take  pleasure  in  recoirmending  Miss  Courtney  as  a 
woman  of  fine  character  and  good  business  Judgment. 

Respectfully  yours. 


C^-'yAt  <>-«Kj)..i<--,-.T^-v.T-,U-c«<r  -^CO(r»-_^a*c^ 


Telegrams,  Cablegrams,  and  Wireless  Messages.  For 
quick  service  the  business  man  frequently  resorts  to  wire 
or  wireless  forms  of  communication.  Although  faciUties 
for  wireless  communications  are  improving  each  year, 
messages  by  wire  between  land  points,  called  telegrams, 
and  those  across  the  seas,  called  cablegrams,  are  still 
commercially  most  economical.  As  the  cost  of  all  such 
messages  depends  upon  the  number  of  words  used,  the 
first  essential  is  extreme  brevity.  In  telegrams  the  body 
of  the  message  only  is  subject  to  charge,  the  address 
and  the  signature  going  free.  The  basis  for  telegraph 
charges  is  ten  words,  or  a  fraction  thereof,  in  the  United 
States  and  Canada,  and  distance  determines  what  this 
charge  shall  be.  Each  additional  word  has  a  unit 
charge.     Figures  of  all  kinds  must  be  expressed  in  words. 

In  order  to  extend  their  service,  telegraph  companies 
now  transmit  messages,  called  night  letters,  at  reduced 
rates,  fifty  words  being  sent  for  the  price  of  a  ten-word 


special  Forms  of  Letters  and  Telegrams       159 

day  telegram.  Such  messages  may  be  filed  any  hour,  to 
be  forwarded  by  telegraph  at  the  company's  conxenience 
during  the  night  and  dehvered  the  following  morning. 

A  further  extension  of  the  service  provides  for  day  letters 
by  which  day  messages  of  fifty  words  or  less  are  sent  for 
one  and  one  half  times  the  cost  of  fifty-word  night  letters. 
Such  messages  are  transmitted  at  any  time  during  the  day 
when  the  wires  are  least  occupied  Avith  day  telegrams. 

In  cablegrams  and  wireless  messages  a  charge  per  word 
is  made  for  every  word,  including  address  and  signature ; 
hence  code  words  are  commonly  employed  in  business. 
Each  code  word  usually  stands  for  several  other  words. 

As  these  messages  are  abridged  or  blunt  business  commu- 
nications, the  mere  courtesies  of  correspondence  are 
omitted.  Telegraph  and  cablegram  blanks  are  provided 
by  the  companies.     Following  is  an  example  of  a  message : 


CtJtSS  OF  SERVICE  DESIRED  | 

m-n.  "iiiini 

r 

O.TUn» 

HWtf  iHoaot 

Ni#ni*n> 

E. 

WESTER  UNION 


i6o  Letter  Writing 

'The  Trent  Warden  Company,  of  Denver,  requiring  the 
promptest  possible  sliipment  of  l"i\e  Model  M  touring  cars 
from  Detroit,  would  wire  the  builders,  the  Eagle  Motor 
Car  Company,  as  shown  in  the  model  on  page  159. 

EXERCISES 

1.  Write  a  letter  to  the  boot  and  shoe  manufacturing  firm 

of  Fitch  and  Holden,  Lynn,  Massachusetts,  ordering 
one  dozen  pairs  of  men's  black  Oxford  shoes,  two 
dozen  pairs  men's  tan  Oxfords,  and  two  dozen  pairs 
women's  canvas  tennis  shoes,  sizes  and  styles  to 
match  those  recently  purchased.  Ask  that  they  be 
shipped  promptly  by  express,  as  you  have  now  on 
file  orders  for  some  of  them.  Remind  the  firm  that 
you  will  expect  the  usual  trade  discounts.  Sign  the 
letter  for  your  firm,  J.  Smitheman  and  Company. 

2.  John  Alexander,  of  Wheeling,  West  Virginia,  is  about  to 

add  to  "his  store  a  department  of  carpets  and  rugs. 
He  writes  a  letter  to  the  Domestic  Carpet  Manu- 
factory, 1750  North  Fiftieth  Street,  Philadelphia, 
Pennsylvania,  stating  this  fact,  and  asking  whether 
they  will  furnish  to  him  his  introductory  stock  up 
to  $5000  in  amount,  and  extend  to  him  a  credit 
for  four  months.  He  refers  them  for  his  credit 
standing  to  The  Wells  Sanders  Company,  wholesale 
dealers  in  notions  in  Philadelphia,  with  whom  he  has 
had  an  open  account  for  five  years,  and  to  the  First 
National  Bank  of  Wheeling,  his  depository.  Write 
this  letter  in  the  name  of  John  Alexander. 

3.  You  have  just  become  a  resident  of  Chicago,  with 

address  at  5310  Prairie  Avenue,  where  you  expect 
to  continue  your  practice  in  medicine  and  surgery. 


special  Forms  of  Letters  and  Telegrams       i6i 

As  you  wish  to  open  for  your  family  a  general  mer- 
chandise account  with  the  Walton  and  Hayes  Com- 
pany, you  write  to  them  asking  for  the  privilege  of 
doing  so.  Before  coming  to  Chicago  you  lived  for 
ten  years  in  New  York,  where  you  maintained  ac- 
counts with  the  Whitaker  Company  and  J.  A.  Stiles 
and  Company.  You  are  personally  known  to  Mr. 
F.  C.  Warner,  president  of  the  Merchants'  Bank  of 
Chicago.  Write  the  best  letter  possible  in  your  own 
interest  to  the  W^alton  and  Hayes  Company. 

4.  You  own  a  house  at  1224  Commonwealth  Ave.,  Boston, 

Massachusetts,  your  own  address  being  Newton, 
Massachusetts.  Miss  Fannie  Langford,  of  Brook- 
line,  Massachusetts,  wants  to  rent  this  property, 
and  has  written  to  you  of  her  desire  to  do  so,  asking 
terms  of  rental.  You  reply  to  her  letter  to-day, 
stating  you  will  be  pleased  to  lease  the  house  to  her 
at  $60  a  month,  in  addition  to  the  water  rate  of  $20 
a  year.  As  you  have  no  personal  acquaintance  with 
her,  you  ask  her  for  references. 

5.  Mrs.   Wmston  Phillips   (Annie  W.   Phillips)   of  New 

Rochelle,  New  York,  has  occasion  to  communicate 
with  Walter  L.  Dyer,  real  estate  agent,  1012  Broad- 
way, New  York,  from  whom  she  rents  her  house. 
She  wishes  to  inform  him  that  certain  repairs  to  the 
roof  are  necessary  because  of  damages  occasioned  by 
a  recent  wind  storm.  Suppose  yourself  to  be  Mrs. 
Phillips,  and  write  a  courteous  letter  to  Mr.  Dyer, 
calling  his  attention  to  the  damage  and  asking  that 
repairs  be  made  promptly. 

6.  You  are  in  your  last  year  at  high  school  and  contemplate 

going  to  college ;  if  a  boy,  to  Yale,  and  if  a  girl,  to 

EL.  OF  BUS. II 


1 62  Letter  Writing 

Bryn  Mawr.  Address  a  letter  to  the  Registrar  of 
Yale  University,  New  Haven,  Connecticut,  or  to  the 
Registrar  of  Bryn  Mawr  College,  Bryn  Mawr,  Penn- 
sylvania, asking  that  a  catalogue  of  the  institution 
be  sent  to  you,  and  inquiring  whether  you  can  be 
admitted  on  certificate  or  whether  an  examination 
will  be  required.  Write  this  letter  as  though  you 
were  a  resident  of  Easton,  Maryland,  and  a  student 
in  the  Easton  High  School. 

7.  As  treasurer  of  the  Browning  Society  of  Springfield, 

Ohio,  you  find  a  number  of  the  members  to  be  de- 
linquent in  the  payment  of  their  annual  dues.  Among 
these  is  Mr.  O.  R.  Witherby,  who  has  not  paid  his 
dues  for  two  years.  Write  him  a  courteous  but  firm 
letter,  calling  his  attention  to  his  delinquency  and 
to  the  rules  of  the  society  which  do  not  permit  of 
an  arrearage  of  more  than  two  years.  Express 
the  hope  that  he  will  hasten  to  place  himself  again 
in  good  standing  by  remitting  to  you  immediately. 

8.  Lawyer  John  B.  Dickson,  839  Market  Street,  San  Fran- 

cisco, California,  has  written  to  you  at  430  Pine 
Street,  Oakland,  Cahfornia,  reminding  you  that  you 
have  failed  to  pay  your  house  rent  for  the  past  two 
months,  and  that  the  account  has  been  placed  in  his 
hands  for  collection.  Reply  to  his  letter  expressing 
regret  at  the  non-payment  of  rent,  offering  as  excuses 
abnormally  heavy  expenses  during  that  time,  due  to 
serious  illness  in  your  family,  and  reduced  income 
because  two  of  the  supporting  members  were  unable 
to  work.  Ask  the  favor  of  another  month's  exten- 
sion, stating  that  at  the  end  of  this  time  you  hope 
to  be  in  a  position  to  pay  all  rent  due. 


special  Forms  of  Letters  and  Telegrams       163 

Q.  You  have  come  into  possession  of  $1000  for  which  you 
have  no  immediate  need,  and  you  have  decided  to 
invest  it.  Write  a  letter  to  J.  S.  Burt  and  Company, 
Baltimore,  Maryland,  specialists  in  bonds  and  mort- 
gages, asking  their  professional  advice  in  the  matter. 
Assure  them  that  you  want  to  avoid  all  risks  of  a 
speculative  nature,  and  that  the  first  element  of 
the  investment  should  be  stability  of  principal. 
Ask  them  to  favor  you  with  a  prompt  reply  and 
to  include  in  it  their  rates  of  commission  both  for 
initial  investment  and  for  the  collection  of  interest. 
You  live  in  Roland  Park,  Baltimore. 

10.  The  firm  of  Wayne  Brothers,  Milwaukee,  Wisconsin, 

has  just  rendered  to  you  a  bill  for  your  January  pur- 
chases of  general  merchandise.  This  bill  contains 
two  errors :  the  Jan.  5  purchase  of  10  yards  of  silk 
is  charged  at  $1.00  a  yard  instead  of  90^  a  yard,  and 
the  shoes  returned  on  Jan.  8  are  credited  at  $3.50 
instead  of  at  $4.00.  Write  a  letter  to  accompany 
the  return  of  this  bill  to  Wayne  Brothers,  requesting 
a  prompt  adjustment  of  the  account.  Your  address 
is  1 61 9  Jackson  Boulevard,  Milwaukee.  (Inclose 
this  letter  in  an  envelope  properly  addressed.) 

11.  Write  a  note  of  introduction  for  your  friend,  Henry  A. 

Morley,  who  is  about  to  spend  a  week  in  Washington, 
D.  C,  this  being  his  first  visit  there.  Address  the 
note  to  your  acquaintance,  George  Quinton,  who 
lives  at  310  Pennsylvania  Avenue,  Washington, 
D.  C.  (Inclose  this  letter  in  an  envelope  properly 
addressed.) 

1 2 .  John  Kent  has  been  a  chauffeur  in  your  service  for  two 

years.     You  are  dispensing  with  your  motor  car, 


164  Letter  Writing 

and  have  no  further  use  for  him.  Write  Mr.  Kent 
a  letter  of  recommendation  which  he  can  use  in  a 
general  way  to  lind  new  employment. 

13.  Write  a  letter  of  recommendation  for  Ida  L.  Williams, 

who  has  been  a  governess  in  your  family  for  ten  years. 
As  the  children  are  now  grown  to  school  age  and  are 
to  be  placed  in  private  schools,  Miss  Williams  is  no 
longer  needed.  She  is  a  woman  of  broad  education, 
social  refinement,  and  forceful  character.  Address 
your  letter  to  Mrs.  L.  M.  Funston,  who  is  a  stranger 
to  you  but  who,  you  have  heard,  is  desirous  of 
engaging  the  services  of  a  governess.  (Use  a  note 
sheet,  fold  and  inclose  it  in  an  envelope  properly 
addressed.) 

14.  While  your  father,  Peterson  Bond,  is  attending  to  busi- 

ness matters  in  St.  Louis,  IMissouri,  your  mother 
falls  seriously  ill.  Dispatch  a  telegram  of  not  more 
than  ten  words  to  your  father,  informing  him  of  the 
illness  and  asking  him  to  come  home  at  once. 

15.  You  recently  purchased  from  the  Purcell  Company, 

Chicago,  Illinois,  by  mail  order,  10  yards  of  black 
silk.  You  find  you  require  2  yards  more,  and  being 
in  haste,  you  telegraph,  specifying  that  the  goods  be 
sent  by  mail,  and  charged  to  your  account.  Prepare 
the  message  not  to  exceed  ten  words. 

16.  You   are   in   Southampton,    England,   ready   to   take 

passage  back  to  New  York  but  are  unexpectedly 
delayed.  In  order  to  allay  anxiety  on  the  part  of 
your  family,  whose  address  is  4509  Sixth  Avenue, 
New  York,  you  cable  these  facts  to  your  father. 
Prepare  the  cablegram  not  to  exceed  six  words. 


PART  vn 

PERSONAL  ACCOUNT  RECORDS 

XXXIII.    CASH  RECORDS 

One  of  the  primary  necessities  of  every  well-ordered  life 
is  an  understanding  and  use  of  some  simple  system  of 
recording  personal  business  transactions.  Every  one  has 
receipts  and  expenditures  of  money,  the  wise  or  unwise 
employment  of  which  vitally  affects  success  in  life. 

The  following  pages  present  a  method  of  personal  accoimts 
adequate  to  the  needs  of  most  people  in  private  life. 

Cash  Records.  Statements  of  receipts  and  expenditures 
may  be  simple  or  complex.  Commercial  accounting  in  its 
diversified  forms  is  adapted  to  the  affairs  of  people  who 
make  a  business  of  buying  and  selling  for  profit ;  while 
personal  or  household  accounting  is  especially  adapted  to  the 
simpler  needs  of  people  whose  income  is  derived  from  labor 
or  invested  wealth. 

In  non-commercial,  as  in  commercial  accounting,  one  of 
the  most  important  elements  is  the  cash  book  for  recording 
money  received  and  paid  out.  A  simple  cash  book  need  be 
nothing  more  than  a  book  ruled  so  as  to  provide  columns 
for  (i)  the  date  of  the  transaction,  (2)  a  statement  of 
the  source  of  the  money  received,  or  of  the  purpose  for 
which  money  is  paid  out,   (3)  the  amount  received,  and 

x6s 


1 66 


Personal  Account  Records 


(4)  the  amount  paid  out.     The   following   example  illus- 
trates this  form  and  a  series  of  entries : 


Gz,<i^  ^otr^ 

SoU 

<^^y«xA/^^tay7t^  ojfc/ia/?iiZ.^ui^U)7i-' 

/^i/uJyi/(j)(- 

(£u/-fftcti 

/<^/i 
5%^ 

/ 

■2 
3 

& 
7 

8 

f 

(/auCAen:t(?//arot*i^,  true,  T^im^t/i  ut^  acCytt^c^ 

/OC? 

SO 

/o 

3 

2 

?? 

/30 

/30 

9>ULY 

9? 

If  the  items  of  receipt  and  expenditure  are  carefully 
written  down  in  accordance  with  the  above  form,  it  is  easy 
to  find  out  how  much  money  has  been  received  and  how 
much  has  been  paid  out,  by  merely  adding  up  the  items  in 
the  two  columns.  It  is  easy  also  to  ascertain  how  much 
money  ought  to  be  on  hand  as  a  balance,  by  subtracting 
the  total  of  the  paid-out  column  from  the  total  of  the 
received  column. 

In  the  above  illustration  the  record  shows  that  $130 
was  received  in  the  course  of  the  week  and  that  $31  was 
paid  out.  The  difference  between  the  two  amounts,  it  will 
be  noted,  is  set  down  in  red  ink  (here  represented  by  heavy 
writing)  as  a  balance  on  hand  in  the  paid-out  column.  As 
the  balance  is  distinguished  from  the  entries  denoting 
actual  payment  by  color  of  ink,  it  may  be  summed  up 
with  the  items  of  payment  as  a  test  of  the  previous  sub- 


Cash  Records  167 

traction,  for  if  the  subtraction  was  correctly  made,  the 
sum  of  the  paid-out  column  plus  the  balance  on  hand  must 
equal  the  total  of  the  received  column. 

Exercise  i.  Draw  up  a  simple  cash-book  form  according  to  the 
model  shown  on  page  166.  Enter  the  following  cash  transactions,  find 
the  balance  of  cash  on  hand  at  the  end  of  each  week,  and  rule  up  the 
form.  This  process  is  commonly  designated  as  balancing  and  closing 
the  cash  book. 

March    i  Student  received  one  month's  salary  in  cash,  $100. 

2  Paid  one  month's  rent  of  room,  $12. 

3  Paid  one  month's  table  board  in  advance,  $20. 

4  Received  cash  for  extra  work,  |i  5. 

5  Paid  laundry  bill  in  cash,  $2.50. 

6  Bought  a  suit  of  clothes  for  cash,  $25. 

Directions.  As  it  is  the  end  of  the  week,  balance  and  close,  being 
careful  to  enter  the  balance  according  to  the  example  above  and  tc 
rule  according  to  the  form. 

March    8  Bought  a  book  costing  $1.50. 

9  Received  as  a  gift  from  home,  $50. 

10  Paid  for  mending  shoes,  $1.25. 

March  10  Bought  a  new  hat  costing  $4. 

10  Paid  for  instruction  in  music,  $20. 

11  Paid  for  writing  materials,  $.65. 

11  Bought  magazine,  $.15. 

12  Received  for  extra  work,  $2.50. 

13  Paid  for  theater  tickets,  $2. 

14  Entertained  a  friend  at  luncheon,  $2.15. 

Directions.  Enter  the  above,  balance  and  close  the  cash  book 
exercise,  as  before. 

Classified  Expenditures.  A  careful  manager,  however, 
will  not  be  satisfied  with  the  use  of  the  simple  cash  book 
alone.  Receipts  and  expenditures  must  be  classified  in 
order  to  reveal  the  answer  to  the  important  question, 
"Where  did   the  money  go?"     In  personal  accounting. 


1 68 


Personal  Account  Records 


for  example,  payments  arc  constantly  being  made  for 
clothing,  food,  amusements,  and  other  purposes,  and  it  is 
evident  that  not  only  the  interest  but  also  the  usefulness 
and  the  influence  of  the  cash  record  will  be  emphasized  by 
grouping  expenditures  of  the  same  kind  together. 

A  classification  of  expenditures  can  be  made  in  a  simple 
way  by  making  use  of  another  little  blank  book,  setting 
aside  a  page  for  each  type  of  expenditure  and  entering 
upon  the  page  the  nature  and  the  amount  of  expense,  after 
payment  is  entered  in  the  cash  book.  At  the  end  of  the 
week  or  the  month  the  pages  may  be  summed  up,  and  the 
result  will  be  the  amount  spent  during  this  time  in  each 
classification.  The  following  are  two  examples  of  classifi- 
cation pages,  one  covering  "  Clothing "  and  the  other 
''Table  Expense:" 


L-^  ^>-t^^?V<-K, 


^^ 


JU^ 


eyci^-{jL'  G/;t'JQeyn,4JL- 


21 


zs 


7S- 


7-s- 


^o/yia. 

f 
•s 
C 

2 
3 

Go 

&, 

/o 

Exercise   2.     Classify  the   following  expenditures,   as  suggested 
above,  by  grouping  them  on  separate  pages,  entitling  the  pages 


Classification  Cash  Book  169 

respectively:   "  Clothing,"  "  Table  Expense,"   "  Light  and  Heat," 
"  Laundry,"  "  Transportation,"  and  "  Miscellaneous." 

April      2     Bought  i  ton  of  coal,  $7.50;  crackers,  $.50. 

3  Bought  I  bbl.  flour,  $4.50. 

4  Bought  oranges,  $.60;  sugar,  $.60;  berries,  $.20;  street 

car  tickets,  $1.00. 

5  Paid  for  dress  goods,  $11.50;  bananas,  $.20. 

6  Paid  daily  paper  for  week,  $.11 ;    theater  tickets,  $3; 

oatmeal,  $.25  ;  suit  for  Henry,  $22  ;  shoes  for  Clara, 

l3- 

7  Paid  gas  bin,  $5.75  ;  collars  and  ties  for  Charles,  $1.25  ; 

laundry,  $1.36  ;   transportation  tickets,  $1. 

8  Paid  picnic    expenses,    $2.85;   magazine,   $.35;   meat 

bill,  $2.85;   potatoes,  $1.50;   paper  and  pens,  $.60. 

Directions.     Sum  up  the  expenditures   entered   on  each  page  to 
determine  the  amount  spent  under  each  heading. 


XXXIV.   CLASSIFICATION   CASH  BOOK 

A  classification  of  cash  expenditures  can  be  made  con- 
veniently and  systematically  by  appending  to  the  cash 
book  record  a  series  of  columns  to  take  the  place  of  the 
extra  pages  to  which  reference  was  made  in  the  preceding 
chapter.  By  this  method,  the  amounts  of  expenditure  in 
the  various  directions  can  be  compared  and  studied  to  good 
advantage  and  as  a  result  unduly  large  unproductive  ex- 
penditures may  be  avoided  in  the  future. 

In  the  following  example  in  personal  expenditures,  pay- 
ments are  classified  according  to  "  Rent,"  "  Food,"  "  Cloth- 
ing," "Laundry,"  "Transportation,"  "Pleasure,"  and 
"  Miscellaneous."  Columns  are  attached  to  the  cash  book 
form  corresponding  with  this  classification.  As  an  expendi- 
ture is  made,  the  amount  is  entered  not  only  in  the  paid- 
out  column  but  also  in  the  classification  column  to  which  the 


I/O 


Personal  Account  Records 


pa}Tnent  belongs.  Thus,  in  the  illustration  given  below,  the 
record  shows  that  out  of  an  expenditure  of  $75.55,  $16  was 
spent  for  room  rent,  $10  for  food,  $40.50  for  clothing,  $.75 
for  laundry,  $2.10  for  transportation,  $2  for  i)leasure,  ancl 
$4.20  for  miscellaneous  items : 


S^rCtX      &tioii/J'^Mt/ e^JrwncaetCem.      /S^.  Okui. 


"S^ 


/Srt/    9iw^  (Zff^'a.  CuimO*^  Tieui^irt  'TboMM  hutai  latixi 


Si^ 


V^' 


Exercise  3.  Carefully  rule  a  sheet  of  paper  according  to  the 
preceding  form,  making  sure  to  provide  a  column  for  the  date  and  a 
sufficiently  wide  space  for  a  description  of  the  transactions ;  a  column 
for  the  receipt  and  another  for  the  payment  of  money ;  ten  columns 
for  a  classification  of  expenditures ;  and  a  column  for  totals.  Enter 
the  titles  at  the  top  of  the  column  as  shown  in  the  model.  Record 
the  following  cash  transactions  in  the  cash  book  section,  and  as  you  do 
so,  enter  the  item  of  expenditure  in  the  proper  classification  column  : 

May  I     Received  cash  for  one  week's  wages,  $18  ;  paid  board  for 
one  week,  $5. 

2  Paid  for  daily  paper,  including   Sunday  edition,  I.77 ; 

bought  suit  of  vmderwear,  $1.60. 

3  Bought  collars,  $1.50;   paid  laundry  bill,  $.78 ;   received 

for  playing  piano  in  theater  orchestra,  $15. 

4  Bought  suit  of  clothes,  $18 ;  paid  for  street  car  tickets,  $1 ; 

bought  necktie,  $1. 


Classification  Cash  Book  171 

5  Bought  birthday  gift  for  Richard,  $1.50;   paid  for  maga- 

zine, $.30;  paid  for  boat  ride,  $.50. 

6  Paid  for  baseball  ticket,  $.50. 

Directions.  Balance  the  cash  record  for  the  week  by  writing  in 
red  ink  "  May  6,  Balance  on  hand,  $ — ,"  the  difference  between  the 
cash  received  and  the  cash  payment  columns ;  and  rule  in  accordance 
with  the  model  shown  on  page  170,  extending  the  single  ruling 
through  the  classification  sheet.  Then  sum  up  the  various  classifi- 
cation columns  and  carry  the  total  of  all  expenditures  forward  in 
the  "  Total  "  column. 

Household  Classification  Cash  Book.  The  cash  book 
and  classification  of  expenses  described  above  may  be 
readily  adapted  to  the  requirements  of  household  accounts 
by  modifying  the  classification  of  expenses  to  suit  the  char- 
acter of  the  expenditures  of  a  household.  The  classifica- 
tion must  be  broadened  appropriately  to  include  in  addi- 
tion to  the  columns  of  the  model,  columns  for  heat,  light, 
wages,  furniture,  insurance,  etc.  It  may  be  made  still 
more  comprehensive  by  the  addition  of  other  columns 
devoted  to  special  expenditures,  but,  as  set  forth,  the 
classification  presents  a  distribution  of  the  cost  of  house- 
hold maintenance  sufficient  to  enable  the  head  of  the 
household  to  account  definitely  for  funds  paid  out. 

Exercise  4.  Rule  a  sheet  of  paper  according  to  the  household 
classification  cash  book  form  shown  on  the  preceding  page,  providing 
a  column  for  the  date  and  a  space  for  a  description  of  the  transactions  ; 
a  column  for  the  receipt  and  another  for  the  payment  of  money ; 
eleven  columns  for  classification  purposes ;  and  a  column  for  totals. 
Enter  the  column  titles  in  accordance  with  the  classification  sheet 
already  shown.  Record  the  following  household  cash  transactions 
and  classify  the  expenditures : 

June    I     Received  cash,  $117.21. 

2     Paid  for  upholstering  3  parlor  chairs,  $22.50;    bought 


172  Personal  Account  Records 

outing  hat,   Ss ;    bought   6  Turkish   towels,   $1.50; 
bought  bed  sheeting,  $5.40. 
3     Bought  a  copy  of  The  Harvester,  $1.35. 

5  Paid  weekly  meat  and  produce  bill  amounting  to  $13.00. 

6  Paid  weekly  bills  as  follows  :   groceries,  $5.50 ;  bread  and 

rolls,  $.77;  milk  and  cream,  $1.12  ;  ice,  $.70;  laundry, 
$1.65. 

Directions.  Balance  and  close  the  record  in  the  same  way  as  in 
the  preceding  personal  classification  cash  record  and  carry  down  the 
balance  of  cash  on  hand  in  black  ink  as  "  June  8,  Balance  on  hand, 
$ — ,"  entering  the  amount  in  the  cash  received  column.  Enter 
the  totals  in  black  ink  at  the  foot  of  the  classification  columns  as 
heretofore. 

Jime    8    Paidforthcater  tickets,  $4;  received  cash,  $100;  bought 
rain  coat,  $10. 
9    Paid  for  street  car  tickets,  $2 ;    paid  for  dress  goods, 
$16.25;  luncheon,  $.65. 

10  Bought  2  tons  of  coal,  $14 ;  paid  for  shoes,  $5  ;  bought 

an  American  history,  $3.50. 

11  Paid  weekly  meat  and  produce  bill  amounting  to  $7.60. 

12  Paid  weekly  bills  as  follows:  groceries,  $4.50;  laundry, 

$2.24  ;  bread  and  rolls,  $.75  ;  ice,  $.80 ;  and  milk  and 
cream,  $1.20. 

Directions.  In  a  continuous  record  it  is  desirable  to  carry  forward 
from  week  to  week  the  total  expenditure  in  each  classification  group. 
To  do  this,  add"  up  the  items  of  expenditure  in  each  column  in  pencil, 
and  then  add  the  result  to  the  total  of  expenditure  in  the  column  at  the 
end  of  the  preceding  week.  Then  single  rule  and  enter  the  new  total 
in  black  ink  as  heretofore.  By  this  method  the  total  in  each  classifi- 
cation column  will  represent  the  total  expenditure  under  the  coliunn 
head  to  date. 

June  IS     Bought  i  doz.  handkerchiefs,  $3;   bought  alarm  clock, 
$2.50;  paid  wages  to  servant,  $25. 

17  Paid  taxes,  $50. 

18  Bought  old  English  sideboard,  $75. 


Elementary  Principles  of  Accounting  173 

19  Paid  weekly  meat  and  produce  bill  amounting  to  $7-63. 

20  Settled  other  weekly  bills  as  follows:    groceries,  $9.70; 

milk  and  cream,  $1.36;    bread  and  rolls,  $.80;    ice, 
$.70;  laundry,  $1.97.    Also  paid  gas  bill  to  date,  $4.40. 

Directions.    Balance  and  close  the  record  in  accordance  with  pre- 
ceding instructions. 


XXXV.    ELEMENTARY   PRINCIPLES    OF 
ACCOUNTING 

So  far  the  account  forms  that  have  been  suggested  are 
adapted  particularly  to  recording  cash  transactions.  When 
transactions  take  place  on  account,  that  is,  upon  the  basis 
of  an  arrangement  for  future  settlement,  the  cash  record 
must  often  be  supplemented  by  a  system  of  ledger  records 
in  order  to  summarize  the  condition  of  business  affairs. 
This  enables  us  to  determine  the  net  results  of  our  business 
activities  :  whether  there  has  been  a  profit  or  a  loss  ;  the 
relationship  between  debts,  or  liabilities,  and  resources,  or 
assets ;  and  the  net  worth.  This  use  of  more  formal 
methods  of  record  keeping  necessitates  the  emplo>Tnent  of 
the  fundamental  principles  of  accounting,  and  therefore  re- 
quires an  elementary  acquaintance  with  them. 

Elementary  Principles  of  Accounting.  At  the  basis  of 
accounting  is  the  conception  that  in  every  transaction,  or 
trade,  value  is  received  on  the  one  hand  and  given  up  on  the 
other.  The  side  receiving  value  is  spoken  of  as  the  debit 
side  and  the  one  giving  up  value  as  the  credit  side.  A 
record  of  debits  and  credits  pertaining  to  the  same  per- 
son, thing,  or  phase  of  business  is  known  as  an  account. 
This  conception  gives  rise  to  two  elementary  accounting 
ideas : 


174 


Personal  Account  Records 


(i)  Every  individual  account  comprises  both  a  debit 
and  a  credit  side. 

(2)  A  transaction  affects  two  accounts,  the  one  which 
receives  value  and  the  one  which  gives  up  value. 

Expression  is  given  to  these  ideas  by  the  use  of  the  fol- 
low^ing  model,  which  may  be  obtained  in  the  form  of  a  book, 
known  as  a  ledger,  or  in  the  form  of  cards  about  3"  X  5" 
in  size. 


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It  is  important  to  note  that  in  arranging  a  set  of  accounts 
we  not  only  look  on  persons  as  having  received  or  given 
value,  but  also  in  the  same  way  regard  the  various  phases  of 
business  and  subjects  of  transactions.  For  instance,  among 
the  impersonal  accounts  that  appear  as  a  result  of  this 
conception  are  cash,  furniture  and  equipment,  real  estate, 
expense,  notes  receivable,  and  notes  payable.  Hence  in  a 
set  of  accounts  there  is  ordinarily  not  only  a  group  with 
persons  called  personal  accounts,  but  also  a  group  with 
subjects  of  transactions  and  phases  of  business  known  as 
book  or  impersonal  accounts. 

As  an  illustration  of  these  principles,  let  us  assume  that 
on  September  2,  J.  Lewis  Henry  receives  on  account  from 
James  Marshall  and  Company  a  desk  valued  at  $25.  To 
make  a  record  of  this  transaction,  Mr.  Henry  sets  aside 


Elementary  Principles  of  Accounting 


175 


account  spaces  in  his  ledger  as  follows :  one  to  cover  the 
transaction  with  James  Marshall  and  Company,  on  which 
his  credit  is  shown ;  and  another  to  show  the  investment 
in  furniture  and  equipment,  a  part  of  which  the  desk 
becomes.     These  accounts  are  shown  below : 


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As  value  to  the  amount  of  $25  has  been  received  by  the  furniture 
and  equipment,  Mr.  Henry  debits  his  Furniture  and  Equipment 
account  for  the  amount,  as  shown  above,  indicating  the  date  of  the 
transaction,  the  nature  of  the  value  received,  and  the  amount  of 
value  received ;  at  the  same  time  he  credits  the  James  Marshall 
and  Company  account,  similarly  showing  the  date  of  the  transaction, 
the  nature  of  the  value  given,  and  the  amount  of  value  given.  A 
glance  at  the  two  accounts  thus  reveals  that  Mr.  Henry  has  put 
into  furniture  and  equipment  value  to  the  amount  of  $25  and  that 
James  Marshall  and  Company  has  given  up  value  on  account,  that 
is,  has  a  credit  or  an  unpaid  claim  against  Mr.  Henry  of  the  same 
amount. 


1/6 


Personal  Account  Records 


Organizatioiv  of  a  Set  of  Accounts.  By  means  of  the 
following  ten  transactions,  extending  over  a  period  of  two 
weeks  and  representing  a  series  of  personal  business  dealings, 
the  organization  of  a  set  of  accounts  is  to  be  studied,  and 
the  transactions  themselves  are  to  be  recorded  according 
to  directions  and  illustrations  given  below : 

Feb.  I.  You  begin  a  record  of  your  affairs,  starting  with 
cash,  $1500. 

Directions.  Write  your  name  over  the  account  form  on  a  ledger 
card  as  shown  in  the  illustration.  Write  "  Cash  "  similarly  on 
another  card,  which,  in  this  record,  will  be  used  instead  of  a  cash  book. 
As  you  are  turning  cash  into  your  business  affairs,  debit  the  cash 
account  and  credit  your  own  personal  account  with  the  amount. 


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Feb.  2.     Paid  apartment  rent  in  cash,  $30. 


Elementary  Principles  of  Accounting 


177 


Directions.  Write  the  title  "  Expense  "  over  a  card.  Debit  the 
expense  account  to  which  the  expenditure  must  be  charged  and 
credit  the  cash  account  with  the  amount  paid  out. 


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Feb.  6.     Received  weekly  salary  in  cash,  $40. 

.Directions.  Write  the  title  "  Earnings  "  over  a  card.  Debit 
the  cash  account  for  the  cash  received,  and  credit  the  earnings  ac- 
count with  the  amount  of  value  produced. 


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Feb.  6.     Paid  table  board  for  week,  $8. 

Directions.     Debit  the  expense  account    for  the    payment,  and 
credit  the  cash  account  with  it. 


Feb.  8.     Received  cash  for  a  short  story  accepted  by  a 
magazine,  $100. 

Directions.     Debit  the  cash  account  for  the  amount  received,  and 
credit  the  earnings  account  for  the  amount  earned. 

EL.  OF  BUS.  — 12 


178 


Personal  Account  Records 


Feb,  9.  Bought  a  desk  on  account  from  Richard  Whar- 
ton, valued  at  $35. 

Directions.  Write  "  Richard  Wharton  "  over  a  card,  and  "  Fur- 
niture and  Equipment  "  over  another  card.  Debit  the  account  of 
furniture  and  equipment  with  the  value  of  the  desk  and  credit  the 
account  of  Richard  Wharton  with  the  same  amount. 


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Feb.  12.     Bought  a  lamp  on  account  from  Albert  Price, 
valued  at  $10. 


Directions.  Write  "  Albert  Price  "  over  a  card.  Debit  the  furni- 
ture and  equipment  account  with  the  value  of  the  lamp  and  credit 
the  account  of  Albert  Price  with  the  same  amount. 


Elementary  Principles  of  Accounting 


179 


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Feb.  13.     Lent  $100  in  cash  to  John  Martin. 

Directions.  Write  "  John  Martin  "  over  a  card.  Debit  the  ac- 
count of  John  Martin  with  the  amount  lent  and  credit  the  cash 
account  with  the  same  amount. 


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Feb.  15.     Received  weekly  salary  in  cash, 


Directions.     Debit  the  cash  account  for  the  amount  received,  and 
credit  the  earnings  with  the  amount  earned. 


Feb.  15.     Paid  table  board  in  cash,  $8. 

Directions.    Debit  the  expense  account  with  the  payment,  and 
credit  the  cash  account  with  it. 


Closing  the  Ledger  Accounts.    In  order  to  find  the  profit 
or  loss  that  results  from  a  series  of  transactions,  and  to 


i8o 


Personal  Account  Records 


clc'lcnniiu"  what  you  are  worth,  it  is  necessary  to  close  the 
set  of  accounts.  The  first  step  in  this  direction  is  the 
making  of  a  trial  balance.  This  is  simply  a  statement 
of  the  total  debits  and  total  credits  as  entered  on  the 
several  ledger  accounts.  In  this  connection  it  must  be 
borne  in  mind  that  all  individual  debits  among  the  en- 
tries were  accompanied  by  parallel  credits,  and  that 
therefore  the  total  of  all  debits  must  equal  the  total  of  all 
credits. 

Directions.  Take  a  sheet  of  paper,  rule  it  according  to  the  form 
shown  below,  and  write  the  title  "  Trial  Balance  "  and  the  date  at 
the  top.  Then  write  the  titles  of  all  accounts  that  appear  in  the 
ledger  set  as  shown  by  the  trial  balance  following.  Carry  the  total 
debits  and  credits  from  each  account  opposite  the  name  of  the 
account  on  the  trial  balance,  using  the  left-hand  or  debit  column 
of  the  trial  balance  for  the  debits,  and  the  right-hand  or  credit 
column  for  the  credits.  Add  both  columns  of  the  trial  balance. 
If  all  the  work  has  been  carefully  done,  the  column  totals  will  be 
equal. 


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Elementary  Principles  of  Ac(5ounting  i8i 


The  next  step  in  the  process  is  closing  the  individual 
ledger  accounts  and  transferring  the  profit  or  loss  and  the 
resources  or  liabilities  ascertained  to  two  summary  accounts, 
entitled  respectively  "  Profit  and  Loss  "  and  "  Resources 
and  Liabilities,"  made  a  part  of  the  set  in  order  to  deter- 
mine net  profit  and  the  net  worth. 

Directions.  Close  the  "  Cash  "  account  as  follows  :  Ascertain  the 
difference  between  the  credit  and  the  debit  columns  of  the  account, 
and,  in  practice,  check  the  difference  thus  found  with  the  actual 
amount  of  cash  on  hand  ;  for  this  difference  and  the  actual  amoimt 
of  cash  on  hand  must  agree.  Write  in  red  ink  on  the  credit  side  of 
the  account,  "  Feb.  i6,  Balance,  $1534."  Sum  up  both  the  debit  and 
the  credit  columns,  entering  the  totals  evenly  on  both  sides  of  the 
account  and  ruling  carefully  in  accordance  with  the  model  below: 


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Close  the  "  Expense  "  account  by  finding  the  total  of  aU  expense 
entries  and  then  writing  on  the  credit  side  of  the  account  in  red  ink 
"  Feb.  16,  Loss,  $46."  Foot  and  rule  the  account  as  in  the  case  of 
preceding  ones. 


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Personal  Account  Records 


Close  the  "  Earnings  "  account.  Find  the  total  of  the  entries 
on  the  credit  side  of  the  account,  and  on  the  debit  side  in  red  ink  write 
"  Feb.  i6,  Profit,  $i8o."  Then  carry  down  the  total  of  both  sides  of 
the  account  as  was  done  in  the  case  of  the  cash  account  or  as  follows : 


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Close  the  "  Furniture  and  Equipment  "  account.  In  closing  this 
account,  it  is  necessary  to  take  into  consideration  the  present  value 
of  the  furniture  and  equipment,  and,  as  the  lamp,  purchased  during 
the  transactions  involved  in  the  set,  was  broken  by  accident,  an 
inventory  of  furniture  and  equipment  shows  only  the  desk  with  its 
value  of  $35.  According  to  the  account,  furniture  and  equipment  cost 
$45.  According  to  the  inventory,  it  is  now  worth  only  $35.  This 
situation  is  shown  on  the  "  Furniture  and  Equipment  "  account  by 
writing  on  the  credit  side  in  red  ink  "  Feb.  16,  Inventory,  $35," 
and  then  writing  in  red  ink  beneath  that  entry  "  Feb.  16,  Loss,  $10," 
as  the  difference  between  the  two  sides  of  the  account.  Foot  and 
rule  both  sides  as  in  previous  accounts. 


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Elementary  Principles  of  Accounting 


183 


All  the  book  accounts  in  the  set  are  now  closed.  In 
accordance  with  practice,  the  remaining  personal  accounts 
will  not  be  closed  until  settlement  balances  them. 

Determining  Net  Profit  or  Loss  and  Net  Worth.  Net 
profit  or  loss  is  determined  by  assembling  the  profits  and  the 
losses  shown  by  the  accounts  in  the  "Profit  and  Loss"  ac- 
count which  has  already  been  opened.  Profits  are  entered 
on  the  right  side  and  losses  on  the  left.  It  is  important  to 
note  that  when  items  are  transferred  from  one  account  to 
another,  they  are  carried  to  the  opposite  side  of  the  other 
account  in  black  ink. 

Directions.  On  referring  back  to  the  accounts  it  will  be  seen  that 
the  "  Earnings  "  account  shows  a  gain  of  $180.  Enter  this  gain  on 
the  right  side  of  the  "  Profit  and  Loss  "  account  in  black  ink,  "  Feb.  16, 
Earnings,  $180."  The  "  Expense  "  account  and  the  "  Furniture 
and  Equipment"  account  show  losses.  Enter  these  losses  on  the 
left  side  of  the  "Profit  and  Loss"  account  in  black  ink  respectively, 
"  Feb.  16,  Expense,  $46  "  and  "  Feb.  16,  Furniture  and  Equip- 
ment, $10."  The  difference  between  the  two  sides  of  the  "Profit 
and  Loss  "  account  shows  a  net  profit  of  $124.  The  account  is 
now  balanced  by  writing  in  red  ink  on  the  left  side  "  Feb.  16,  Net 
Profit,  $124,"  and  is  closed  by  summing  up  both  sides  and  ruling 
similarly  to  previous  accounts.  Completed,  this  account  appears 
as  follows : 


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1 84 


Personal  Account  Records 


On  glancing  back  at  the  student's  account,  it  will  be 
seen  that  the  student  started  with  $1500.  Since  there 
has  been  gained,  according  to  the  "  Profit  and  Loss  " 
account,  $124,  the  student  must  now  be  worth  $1624,  and 
this  amount  must  be  available  after  all  debts,  or  liabilities, 
are  subtracted  from  the  resources,  or  assets,  which  include 
not  only  cash  but  also  property  owned  by  the  student  as 
well  as  balances  due  the  student.  It  is  important  to  note 
at  this  point,  in  personal  accounts,  that  if  the  total  debits 
exceed  the  total  credits,  the  account  shows  a  resource  ; 
and,  on  the  other  hand,  if  the  total  credits  exceed  the  total 
debits,  the  account  shows  a  liability. 

Directions.  To  determine  the  net  worth  of  the  student,  gather 
together  all  the  resources  and  the  liabilities  shown  by  the  set  of  ac- 
counts and  enter  them  in  the  "  Resources  and  Liabilities"  account, 


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putting  the  resources  on  the  left  side  and  the  liabilities  on  the  right 
side.  Going  back  over  the  accounts,  you  find  that  the  first  one  to 
show  a  resource  is  the  "  Cash  "  account  with  its  balance  on  hand. 
Enter  this  on  the  "  Resources  and  Liabilities  "  account  in  black  ink  on 
the  left  side,  "  Feb.  16,  Cash,  $1534."  The  second  account  showing  a 
resource  is  the  "  Furniture  and  Equipment  "  account  with  its  in- 
ventory of  furniture  on  hand  valued  at  $35.  Enter  this  also  in  the 
"  Resources  and  Liabilities  "  account  in  black  ink  on  ihc  left  side, 
"  Feb.   16,  Furniture  and   Equipment,  $35."    The   third   account 


Elementary  Principles  of  Accounting  185 

showing  a  resource  is  that  of  John  Martin,  who  owes  the  student 
$100.  Enter  this  on  left  side  of  the  "  Resources  and  Liabilities  " 
account,  "  Feb.  16,  John  Martin,  $100."  The  accounts  of  Richard 
VVhaj-ton  and  Albert  Price  each  show  a  liability.  Enter  them  on 
the  right  side  of  the  "  Resources  and  Liabilities  "  account  in  black 
ink,  respectively:  "Feb.  16,  Richard  Wharton,  $35"  and  "  Feb.  16, 
Albert  Price,  $10." 

The  difference  between  the  student's  resources  and  liabilities, 
according  to  the  "  Resources  and  Liabilities  "  account,  now  shows  it- 
self to  be  $1624,  thereby  confirming  the  student's  net  worth  as  estab- 
lished by  adding  to  the  original  $1500,  upon  the  basis  of  which  the 
transactions  were  started,  the  $124  gained  as  a  result  of  the  transac- 
tions. 

To  balance  and  close  the  "  Resources  and  Liabilities  "  account, 
enter  on  the  right  side  in  red  ink  "  Feb.  16,  Net  Worth,  $1624," 
sum  up,  and  rule  as  usual  with  the  other  accounts. 

The  final  step  in  closing  the  set  of  accounts  leads  back  to  the 
student's  own  account.  To  balance  and  close  this  account,  enter 
on  the  right  side  in  black  ink  under  "  Feb.  i,  Cash,  $1500,  "  the  amount 


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of  the  profit,  "  Feb.  16,  Net  Profit,  $124  "  and  on  the  left  side  in  red 
ink,  "Feb.  16,  Net  Worth,  $1624."  Foot  and  rule  the  account  in 
the  propel*  way. 

Exercise  5.     According  to  preceding  illustrations  and  instructions, 
organize  a  set  of  accounts  to  cover  the  transactions  following : 

March    i     Start  record  with  cash  on  hand,  $2000. 
2     Paid  house  rent  in  cash,  $30. 
4    Received  weekly  salary  in  cash,  $50. 


1 86  Personal  Account  Records 

March    6     Paid  grocerj'  and  provision  bill  for  week,  $9. 

8  Received  for  monograph  accepted  by  newspaper,  $75. 

9  Bought   a  living-room    chair  on    account  from   the 

Hardwood  Furniture  Company,  $50. 

11  Loaned  $50  in  cash  to  Paul  Jones. 

12  Bought  a  living-room  table  on  account  from  Putnam 

and  Company,  $18. 
12     Received  weekly  salary  in  cash,  $50. 
15     Paid  grocery  and  provision  bill  for  week,  $12. 
Close  the  accounts  and  determine  how  much  ahead  you  are  in  cash 
and  resources. 

March  16     Received  from  John  Martin  in  settlement  of  his  loan 
of  Feb.  13,  $100. 

17  Paid  tailor  for  suit  of  clothes,  $35. 

18  Loaned   to   Paul  Jones   an    additional    $50    on    his 

promissory  note. 
Directions.  As  this  loan  was  made  on  the  basis  of  a  promissory 
note  payable  to  you,  an  account  must  be  opened  with  notes 
receivable.  The  transaction  practically  amounts  to  a  purchase  of 
the  promissory  note.  Therefore  open  a  "  Notes  Receivable  "  account, 
debiting  it  with  the  face  amount  of  the  note,  and  credit  the  cash 
account  with  the  amount. 

20     Received  weekly  salary  in  cash,  $50. 

22  Paid  grocery  and  provision  bill  for  week,  $15. 

23  Paid  for  theater  tickets,  $3. 

24  Received  for  article  accepted  by  magazine,  $100. 

25  Contributed  to  Red  Cross,  $5. 

Directions.  Open  an  account,  entitling  it  "Benevolence,"  and 
debit  it  with  the  amount  contributed.  Credit  the  cash  accoimt  with 
the  same  amoimt. 

26  Paid  balance  due  the  Hardwood  Furniture  Company, 

$50. 
Close  the  accounts  as  before  and  determine  how  much  ahead  you 
are  in  cash  and  resources,  keeping  in  mind  that  the  notes  receivable 
account  will  show  a  resource  and  the  benevolence  account  technically 
a  loss. 


SUPPLEMENTARY  QUESTIONS 

GENERAL  PRINCIPLES  OF  EXCHANGE,  MONEY,  AND  CREDIT 

What  is  business  exchange  ?  What  are  the  three  main  stages 
in  the  development  of  business  exchange?  What  is  barter? 
What  characteristics  make  barter  less  and  less  suitable  as  the 
business  community  expands?  In  what  period  of  the  history 
of  the  United  States  did  barter  prevail?  Give  some  illustra- 
tions. What  was  introduced  to  overcome  the  shortcomings  of 
barter  as  a  basis  of  exchange  ? 

What  is  a  money  commodity?  How  does  it  happen  that  so 
many  ordinary  commodities  like  cattle,  furs,  and  even  iron 
could  be  used  as  money  ? 

What  was  used  as  money  in  the  early  days  of  Israel?  In 
ancient  Greece?  In  early  Rome?  In  the  early  colonial  days 
of  Virginia?  Of  Massachusetts?  What  makes  such  com- 
modities unsuitable  as  money,  except  under  unusual  conditions  ? 

What  are  primarily  the  functions  of  money?  What  do  we 
mean  when  we  speak  of  "money  as  a  medium  of  exchange"? 
As  a  "  standard  of  deferred  payment "  ?  As  a  "  common  denom- 
inator," in  which  is  expressed  the  values  of  other  commodities? 
What  commodities  best  serve  these  purposes?  What  char- 
acteristics make  the  precious  metals  most  suitable  as  a  money 
commodity?  Why  does  gold  show  advantages  over  silver? 
What  is  the  difference  between  monometallism  and  bimetallism? 
What  countries  in  the  world  are  on  a  monometallic  basis?  For 
what  purposes  are  baser  metals,  like  copper  and  nickel,  used  as 
money?    Why  would  it  be  inconvenient  and  sometimes  im- 

187 


1 88  Supplementary  Questions 

possible  to  make  use  of  actual  money  every  time  a  transaction  is 
entered  into  ?  How  many  times  greater  than  our  money  supply 
is  the  amount  of  business  exchange  in  the  United  States  ? 

What  is  credit?  Upon  what  two  judgments  does  it  rest? 
When  is  the  credit  of  an  individual  said  to  be  good  ?  When  is 
it  said  to  be  bad?  What  effect  upon  the  organization  of  the 
business  world  has  the  widespread  use  of  credit  ?  What  great 
institutions  are  primarily  the  outgrowth  of  credit  transactions? 

MONEY    SYSTEM    OF    THE    UNITED    STATES 

How  largely  is  money  used  in  the  daily  transactions  of  the 
people  of  the  United  States,  and  why  is  it  a  very  essential  part 
of  our  economic  organization  ? 

What  is  a  dollar?  Is  it  still  made  as  a  coin?  Is  its  value 
fixed  or  variable?     Explain. 

What  is  meant  by  the  term  "price"?  Name  the  unit  in 
which  the  values  and  prices  of  commodities  are  expressed  in 
every  leading  country  of  the  world.  What  is  subsidiary  coin- 
age? What  metals  are  used  for  sulJSidiary  coins  in  the  United 
States?  What  are  the  silver  coins?  The  nickel  coins?  The 
copper  coins?  What  fixes  the  purchasing  power  of  subsidiary 
coins  in  exchange?  How  much  silver  is  there  in  a  dollar? 
What  is  the  ratio  between  the  silver  dollar  and  the  gold  dollar  ? 
Did  the  plan  to  put  this  ratio  on  a  "i6  to  i "  basis  signify  the 
cheapening  or  the  increasing  power  of  silver  in  exchange  ? 

What  is  paper  money?  What  is  meant  by  the  term  "fiat" 
or  "token"  money?  How  many  kinds  of  paper  money  are 
issued  in  the  United  States?  Explain  the  nature  of  the  contract 
underlying  a  gold  certificate;  a  silver  certificate;  a  treasury 
note ;  a  greenback ;  a  national  bank  note ;  a  Federal  reserve 
note.  What  is  an  emergency  currency?  How  do  Federal 
reserve  notes  serve  the  purposes  of  emergency  currency? 
Explain  why  it  is  that  when  there  is  a  scarcity  of  money  the 
amount  of  Federal  reserve  notes  will  automatically  increase. 


Bills,  Invoices,  and  Statements  of  Account      189 

What  are  the  difficulties  in  the  way  of  unlimited  issues  of  green- 
backs? Explain  Gresham's  law  that  "poor  money  always 
drives  out  good  money."  What  is  legal  tender  money?  What 
is  the  legal  tender  money  of  the  United  States  at  the  present 
time?  If  you  were  entering  into  a  long-time  contract,  what 
money  should  you  select  for  settlement  ?  Why  have  contracts 
based  on  gold  advantages  over  those  based  on  legal  tender? 

BILLS,    INVOICES,    AND    STATEMENTS    OF   ACCOUNT 

What  is  meant  by  doing  business  on  account  ?  What  are 
some  of  the  personal  requisites  for  doing  business  on  account? 
Name  some  of  the  business  instruments  or  papers  used  to  bring 
about  payment  and  settlements  of  credit  transactions. 

What  is  a  bill  ?  What  is  an  invbice  ?  What  is  a  statement  of 
account?  In  what  respect  is  a  distinction  drawn  between  bills 
and  invoices?  How  does  the  statement  of  account  differ  in 
form  from  the  other  two?  What  should  a  bUl  or  an  invoice 
show? 

Is  there  any  advantage  in  the  use  of  "To  Henry  S.  Johnson, 
Dr."  over  "  Bought  of  Henry  S.  Johnson"  as  a  heading  for  bills 
calling  attention  to  indebtedness  not  only  for  material  things 
but  for  services  as  well  ? 

How  should  a  bill  be  receipted  on  payment?  What  should 
the  signature  show  if  some  one  other  than  the  creditor  receives 
payment  ? 

Explain  the  meaning  of  discounts.  What  is  the  difference 
between  a  cash  and  a  trade  discount  ?  What  is  the  purpose  of 
allowing  cash  discounts  and  trade  discounts?  How  are  cash 
discounts  indicated  on  a  billhead  ?  How  is  a  deduction  on 
account  of  discount  indicated  on  a  bill  at  settlement  ? 

What  should  a  statement  of  account  show?  Should  it  be  an 
itemized  statement  of  indebtedness? 

What  is  an  assignment?  What  is  the  form  of  an  assignment 
contract  ?  » 


190  Supplementary  Questions 

COMMERCIAL   DRAFTS 

What  is  a  commercial  draft  ?  What  is  its  significance  in 
business  transactions?  What  is  the  difference  between  a  two- 
party  and  a  three-party  draft  ?  What  is  the  difference  between 
a  sight  draft  and  a  time  draft  ?  Who  is  the  drawer  of  a  draft  ? 
Who  is  the  drawee  ?  Who  is  the  payee  ?  What  is  an  accept- 
ance ?  What  is  the  legal  responsibility  of  the  acceptor  ?  What 
is  the  difference  in  procedure  on  the  part  of  the  drawee  when 
presented  with  a  sight  draft  or  a  time  draft  ?  What  difference 
does  it  make  whether  the  draft  calls  for  payment  at  "ten  days' 
sight "  or  "  ten  days  after  date  "  ? 

What  is  meant  by  "dishonoring  a  draft"?  What  is  a  pro- 
test? Is  a  draft  which  has  not  been  accepted  subject  to 
protest  proceedings?  Before  what  official  of  the  government  is 
protest  made  ?     What  is  the  approximate  cost  of  a  protest  ? 

What  are  the  steps  in  the  collection  of  a  draft  ?  Why  should 
the  drawee  be  notified  before  a  draft  is  drawn  on  him?  What 
is  done  with  a  two-party  draft  to  secure  its  collection  and  pay- 
ment? During  collection,  who  is  responsible  for  the  amount  of 
the  draft  and  for  incidental  charges  accruing  in  the  course  of 
collection?  Why  are  three-party  drafts  of  but  little  use  at 
the  present  time?  When  drawn,  to  whom  should  the  draft 
be  sent  —  to  the  payee  or  to  the  drawee  ?  What  steps  must 
then  be  taken  to  secure  its  collection  ? 

What  is  a  trade  acceptance?  What  business  advantages 
accrue  from  the  use  of  trade  acceptances  ? 

PROMISSORY  NOTES 

What  is  a  promissory  note?  What  is  the  form  of  a  simple 
promissory  note?  Who  is  the  maker?  The  payee?  Under 
what  conditions  of  business  are  promissory  notes  used?  Into 
what  two  classifications  may  promissory  notes  be  divided  on  the 
basis  of  time  ?    What  is  a  demand  note  ?    A  call  note  ?    When 


k  Promissory  Notes  191 

is  each  payable?  What  is  the  usual  duration  of  a  commercial 
time  note? 

What  is  a  joint  note?  What  is  a  joint  and  several  note? 
WTiat  is  the  legal  difference  of  liability  of  a  signer  in  a  joint  note 
and  in  a  joint  and  several  note  ? 

What  is  security?  What  circumstances  of  the  maker  at 
times  make  security  necessary?  What  is  personal  security? 
Collateral  security?  Lien  security?  State  some  of  the  advan- 
tages and  some  of  the  disadvantages  of  each  kind  of  security. 
Under  what  circumstances  would  each  be  best  adapted  for  use? 

What  notes  are  the  outgrowth  of  personal  security  ?  What  is 
the  form  by  which  personal  security  is  indicated  on  an  accommo- 
dation note?  On  an  indorsed  note?  On  a  guaranteed  note? 
How  does  the  old-fashioned  type  of  accommodation  paper 
differ  from  the  accommodation  paper  in  use  among  banks  of  the 
present  day? 

What  notes  are  the  outgrowth  of  collateral  security?  What 
constitutes  collateral  security  ?  What  is  the  nature  of  collateral 
security?  WTiat  is  the  form  of  a  collateral  note?  What  four 
particular  conditions  form  a  part  of  the  collateral  note  contract  ? 
How  long,  generally  speaking^  does  the  maker  of  a  collateral  note 
have  to  make  good  a  depreciation  in  the  security  value  of 
collateral  ? 

What  notes  are  the  outgrowth  of  lien  security?  What  is  a 
judgment  note?  What  are  the  main  provisions  of  the  supple- 
mentary contract  attaching  to  a  judgment  note?  What  is 
meant  by  "confession  of  judgment  for  principal  and  cost"? 
By  "waiving  rights  to  inquisition  and  error"?  By  "laws 
exempting  property"?  What  is  the  difference  between  a  judg- 
ment note  and  a  judgment  note  with  power  of  attorney?  Why 
is  a  judgment  note  with  power  of  attorney  particularly  drastic 
in  its  provisions?  Under  what  conditions  should  it  be  used? 
From  the  standpoint  of  the  payee,  what  steps  must  be  taken 
at  the  county  recorder's  office  to  make  the  claim  a  lien  against 
the  property  of  the  maker?     What  is  the  effect  of  recording  a 


192  Supplementary  Questions  ' 

judgment  note  on  the  ability  of  the  maker  freely  to  transfer 
property  in  an  exchange?  Why  does  a  credit  agency  regard 
an  individual  who  has  resorted  to  a  general  use  of  judgment 
notes  as  in  the  last  throes  of  business  instability  ? 

INDORSEMENT   AND   PROTEST 

What  is  meant  by  "indorsement"?  What  is  the  legal  sig- 
nificance of  indorsement  ?  What  are  the  three  important  types 
of  indorsement  ?  Where  should  the  indorsement  be  written  on 
the  instrument  of  exchange?  What  is  indorsement  in  blank? 
Indorsement  in  full?  Indorsement  for  a  particular  purpose? 
To  whom  does  indorsement  in  blank  make  the  instrument 
payable?     Why  is  indorsement  in  blank  questionable? 

What  is  a  protest  ?  Under  what  circumstances  should  protest 
be  resorted  to  ?  What  steps  must  be  taken  by  the  holder  of  the 
instrument  in  a  protest  proceeding?  How  soon  after  the  non- 
fulfillment of  the  promise  must  these  steps  be  taken?  What 
formal  action  is  necessary  by  a  notary  public  or  other  officer 
of  record  in  protest  proceedings?  What  responsibility  rests 
upon  the  indorser  of  protested  instruments?  What  is  the 
order  of  liability  of  indorsers  ? 

GENERAL    PRINCIPLES    OF    BANKING    AND    SAVINGS 
INSTITUTIONS 

What  is  the  present  function  of  the  banker?  What  was  his 
function  several  centuries  ago?  What  was  the  work  of  the 
money-changers  of  Biblical  times?  What  important  extra 
services  did  the  goldsmiths  perform  in  the  Middle  Ages  in  Eng- 
land? What  was  the  primary  work  done  by  the  Bank  of 
Amsterdam  and  the  Bank  of  Hamburg  in  the  fourteenth  cen- 
tury? What  condition  in  social,  economic,  and  political  affairs 
in  Europe  during  the  Middle  Ages,  and  even  up  to  the  last 
century,  made  the  work  of  banking  largely  a  matter  of  safe- 
keeping and  money-changing  ?  Why  is  it  that  even  to  this  day 
we  look  upon  banks  simply  as  safe  places  to  keep  our  money  ? 


Commercial  Banks  193 

What  conditions  have  greatly  modified  the  work  of  banking 
during  the  last  century?  How  has  the  widespread  use  of  credit 
affected  the  position  of  banking  in  the  community  ?  What  two 
important  lines  of  banking  have  been  added  in  modern  times  to 
the  former  activities  of  banks  ? 

In  a  theoretical  sense,  into  what  main  groups  of  banking 
institutions  is  the  field  of  banking  subdivided?  What  is  the 
reason  for  this  subdivision  ? 

What  are  the  special  lines  of  activity  of  commercial  banks? 
What  is  meant  by  a  "regular  channel  for  the  settlement  of  debt 
by  credit  exchange,"  by  "  collection  of  claims  arising  under 
promissory  notes  and  commercial  drafts,"  by  "granting  short- 
time  loans"?  Are  there  any  other  lines  of  work  that  are 
performed  by  commercial  banks  ? 

What  are  savings  banks  and  savings  funds?  How  does  the 
work  of  this  type  of  bank  differ  from  the  work  of  the  commercial 
group?  What  are  the  chief  lines  of  savings  bank  activities? 
Why  is  the  nature  of  this  type  of  banking  such  that  funds  in  its 
hands  must  be  held  for  more  or  less  definite  and  long  periods  of 
time? 

What  are  cooperative  banks?  What  are  building  and  loan 
associations  ?  In  what  respects  do  these  institutions  differ  from 
savings  banks? 

What  are  private  banks  ?  What  role  did  private  banks  play 
in  the  past  ?  How  has  the  change  in  the  banking  world  affected 
the  activities  of  private  banks  ?  What  are  the  primary  functions 
of  the  private  banks  to-day  ?  Why  is  the  field  of  foreign  banking 
in  the  United  States  more  or  less  closely  associated  with  private 
banks  ?  What  are  trust  companies  ?  In  what  respects  do  they 
differ  from  banks  ? 

COMMERCIAL    BANKS 

What  accounts  for  the  present  importance  of  commercial 
banks  ?  Cite  the  functions  of  commercial  banks.  What  advan- 
tage is  found  in  the  use  of  checks?     How  does  a  commercial 

EL.  OF  BUS. 13 


194  Supplementary  Questions 

bank  perform  a  highly  im[)()rtanl  function  in  collecting  promis- 
sory notes,  drafts,  and  other  instrvmients  of  exchange?  What  is 
meant  by  taking  promissory  notes  and  other  evidences  of  debt 
at  discount?  In  what  sense  does  a  commercial  bank  broaden 
the  power  of  individual  or  personal  credit  ?  Why  is  it  true  that 
the  personal  credit  of  an  individual  is  more  far-reaching  when 
used  through  the  channels  of  the  commercial  banking  system 
than  when  applied  directly  ? 

What  was  the  condition  of  banking  in  the  United  States  prior 
to  1863  ?  What  was  the  reason  that  banking  relations  fell  into 
such  a  chaotic  condition?  What  were  the  popularly  called 
"wild-cat  banks"?  The  so-called  "red  dog  banks"?  Where 
did  they  thrive?  How  did  they  bring  all  banking  into  dis- 
repute? What  was  the  "Suffolk  System  of  Massachusetts"? 
What  was  the  "Safety  Fund  System  of  New  York"?  Give 
some  reasons  why  these  systems  did  much  to  safeguard  banking, 
but  were  helpless  to  correct  the  real  faults  of  the  time. 

What  is  the  National  Bank  Act?  When  was  it  passed? 
For  what  two  important  purposes  was  it  passed?  How  did  it 
affect  existing  banks?  How  are  members  of  the  National 
Banking  System  designated  ?  What  are  the  provisions  of  the 
law  that  aim  at  permitting  only  men  of  capability  and  integrity 
to  enter  the  banking  business  ?  What  are  the  provisions  of  the 
law  that  aim  at  protecting  the  deposits  of  a  depositor  against 
losses  due  to  mismanagement?  How  does  the  possession  of 
initial  capital  partly  perform  this  function?  To  what  extent 
are  stockholders  and  directors  held  personally  liable  for  losses 
of  depositors?  What  is  a  reserve?  To  what  extent  does  the 
law  require  banks  to  maintain  reserves?  On  what  principle  does 
the  government  feel  warranted  in  designating  certain  cities  to  be 
reserve  cities,  and  what  economic  situation  makes  it  possible 
to  further  designate  New  York,  Chicago,  and  St.  Louis  as  central 
reserve  cities? 

What  constant  supervision  by  government  authorities  is 
maintained  over  members  of  the  National  Banking  System? 


Depositing  in  a  Commercial  Bank  195 

In  what  important  respects  did  fifty  years  of  experience  with 
the  National  Bank  Act  show  defects  in  the  National  Banking 
System?  Why  was  the  national  bank  note  currency  inelastic? 
What  difficulty  does  the  community  suffer  from  inelastic  cur- 
rency? How  are  times  of  money  stringency  caused  by  such  a 
currency  ?  Why  will  money  stringency  sometimes  develop  into 
a  panic?  What  action  did  -Congress  take  on  this  course  in 
December,  1913?  What  is  the  object  of  the  Federal  reserve 
system  ? 

What  is  a  Federal  reserve  bank?  With  whom  is  it  au- 
thorized to  do  business?  What  important  changes  in  our 
National  Banking  System  were  made  by  the  Federal  Reserve 
Act?  What  were  the  provisions  with  respect  to  the  issue  of 
bank  notes?  What  is  a  Federal  reserve  note?  What  is  the 
security  back  of  a  Federal  note?  What  leads  automatically 
to  the  retirement  of  these  notes  when  demand  for  them  ceases  ? 

What  provisions  in  the  Federal  Reserve  Act  change  the  basis 
of  reserves?  Into  how  many  districts  is  the  United  States 
divided  for  reserve  purposes?  How  does  the  presence  of  a 
Federal  reserve  bank  assist  the  money  situation  in  a  com- 
munity ?  How  do  the  provisions  of  the  reserve  affect  the  rural 
districts?  What  was  there  in  the  old  National  Bank  Act  that 
stood  in  the  way  of  a  farmer  securing  the  necessary  current 
funds  while  his  crops  were  in  process  of  maturing  ? 

DEPOSITING    IN    A    COMMERCIAL    BANK 

How  is  a  commercial  bank  organized?  What  difference  is 
there  between  the  organization  of  a  state  bank  and  a  national 
bank?  What  is  the  function  of  the  board  of  directors  of  a 
bank?  Of  the  president?  Of  the  cashier?  To  what  extent 
do  customers  of  commercial  banks  come  into  contact  with  the 
president  ?  With  the  cashier?  What  is  the  particular  work  of 
the  receiving  teller  and  of  the  paying  teller  of  a  bank?  What 
service  is  performed  by  the  credit  department  ? 


196  Supplementary  Questions 

What  steps  must  be  taken  in  opening  a  commercial  bank 
account?  Why  is  direct  introduction  essential?  Why  is  a 
copy  of  the  customer's  signature  essential?  What  is  a  pass 
book  ?  In  what  way  has  the  pass  book  system  been  supplanted 
by  other  types  of  deposit  record  in  certain  sections  of  the 
country?    What  is  meant  by  "balancing  a  pass  book"? 

What  principle  of  commercial  banking  limits  the  nature  of 
the  items  that  may  be  deposited?  What  items  fall  within  the 
scope  of  a  commercial  bank's  deposits? 

What  is  a  deposit  slip  ?  How  should  items  be  listed  on  the 
deposit  slip?  What  is  the  reason  for  distinguishing  between 
out-of-town  deposits  and  in-town  deposits?  How  should  out- 
of-town  deposits  be  listed  ?  How  should  in-town  deposits  be 
•listed?  How  should  the  items  of  deposit  be  arranged  when 
handed  to  the  receiving  teller  with  the  deposit  slip  ? 

COMMERCIAL   BANK   CHECKS 

What  is  a  customer's  check?  Why  have  banks  adopted 
regular  forms  of  checks?  What  is  safety  paper?  Why  is  it 
used  in  check  books  ? 

In  what  respects  must  care  be  exercised  in  the  filling  in  of  a 
check  form?  What  is  the  effect  of  an  undated  check  upon  its 
legality?  What  is  the  effect  of  a  postdated  check ?  Is  a  check 
dated  on  Sunday  valid?  How  should  the  amount  be  filled  in 
so  as  to  prevent  "raising"?  When  a  difference  between  the 
written  amount  and  the  amount  in  figures  occurs,  which  is 
binding  upon  the  drawer?  Of  what  importance  is  the  phrase 
"pay  to  the  order  of "  ?  If  the  signature  is  not  the  same  as  that 
originally  filed  with  the  bank,  is  the  check  a  good  order  on  the 
funds  in  the  bank  ? 

Of  what  use  is  the  stub  of  a  check  ?  What  information  does 
it  generally  record?  Why  is  regularity  in  filling  out  the  stub 
of  a  check  important?  What  is  an  overdrawn  account ?  Why 
should  the  stub  and  the  check  be  numbered  alike?  Of  what 
particular  use  is  such  numbering? 


Commercial  Bank  Collections  and  Settlements     197 

When  money  is  to  be  withdrawn  from  a  bank  by  a  depositor 
in  person,  how  should  it  be  drawn  ? 

COMMERCIAL   BANK    CERTIFIED    CHECKS   AND    OTHER 
INSTRUMENTS 

Under  what  circumstances  will  the  ordinary  customer's  check 
be  unsatisfactory  in  exchange?  What  is  a  certified  check? 
From  the  standpoint  of  credit  exchange,  why  is  the  certified 
check  better  than  the  customer's  check?  What  feature  dis- 
tinguishes the  certified  check?  How  may  a  certified  check  be 
obtained?  What  steps  are  taken  at  once  by  the  bank  when  a 
certified  check  is  secured  by  a  customer?  To  whose  order 
should  it  be  made  payable?  If  a  certified  check  is  not  used, 
what  should  be  done  with  it?  What  effect  on  the  customer's 
account  would  the  loss  or  destruction  of  a  certified  check  have  ? 

What  is  a  cashier's  check  ?  How  does  it  differ  from  a  certified 
check?  From  a  customer's  check?  Why  has  it  advantages 
over  the  customer's  check?  Under  what  circumstances  is  it 
well  to  use  a  cashier's  check? 

What  is  a  bank  draft  ?  How  does  a  bank  draft  differ  from  a 
cashier's  check?  Under  what  circumstances  can  a  bank  draft 
be  advantageously  used?  Why  is  it  necessary  sometimes  for  a 
bank  to  charge  exchange  on  a  bank  draft?  Under  what  cir- 
cumstances will  a  bank  grant  a  bank  draft  below  par  ? 

What  is  a  certificate  of  deposit?  What  conditions  apply 
when  funds  are  deposited  under  a  certificate  of  deposit?  Are 
such  certificates  transferable?  What  is  the  advantage  of 
depositing  funds  under  a  certificate  of  deposit  ? 

COMMERCIAL    BANK    COLLECTIONS    AND    SETTLEMENTS 

What  two  organized  means  have  been  provided  by  commercial 
banks  to  effect  collection  and  settlement  of  credit  instruments  ? 
What  is  a  clearing  house?  What  is  the  general  scheme  of  a 
clearing  house  organization?  What  are  the  advantages  of  the 
clearing  house? 


198  Supplementary  Questions 

What  is  the  correspondent  bank  system?  How  "does  this 
make  possible  the  settlement  of  checks  and  other  claims  over 
wide  areas  with  a  minimum  of  delay?  How  would  a  check 
drawn  on  a  bank  in  Boston  and  sent  to  a  payee  in  Sitka,  Alaska, 
be  settled  and  paid  ? 

Why  are  collection  charges  sometimes  necessary?  What  is 
the  approximate  charge  made  by  banks  for  collection  of  checks, 
drafts,  and  other  instruments?  Why  are  such  charges  not 
always  imposed? 

COMMERCIAL   BANK   LOANS   AND    DISCOUNTS 

What  two  general  types  of  loans  may  be  made  by  the  com- 
mercial bank?  For  what  duration  are  such  loans  generally 
made?  Under  what  conditions  may  a  customer  of  a  bank 
borrow  from  the  funds  of  the  bank?  What  limits  the  amount 
that  he  may  borrow  ?  What  security  must  he  give  to  the  bank  ? 
What  is  accommodation  paper  ?  Under  what  conditions  may  a 
person  who  is  not  a  customer  of  the  bank  borrow  on  accommoda- 
tion of  the  bank?  What  security  protects  the  bank  from  non- 
fulfillment of  the  promise  to  pay  back  the  amount  ?  Generally 
speaking,  to  whom  is  a  note  of  accommodation  made  payable 
and  how  is  it  turned  over  to  the  bank  ? 

What  is  a  collateral  loan?  What  three  special  conditions 
are  found  in  the  supplementary  contract  attaching  to  a  collateral 
note  governing  the  security  of  the  loan  ? 

What  is  meant  by  discounting  "  commercial  paper  "  ?  Why  is 
such  discounting  important  in  a  community  that  depends  upon 
credit  as  a  basis  of  exchange?  What  remuneration  is  obtained 
by  the  bank  for  this  service  ? 

SAVINGS   BANKS 

What  is  a  savings  bank?  What  is  a  postal  savings  bank? 
A  mutual  savings  bank?  A  joint  stock  savings  bank?  How 
do  the  three  differ  in  management  and  control  ?    When  and  why 


Savings  Banks  199 

were  savings  banks  first  established  ?  What  is  the  approximate 
amount  of  savings  in  the  United  States  at  the  present  time? 
Why  do  savings  banks  afford  a  barrier  against  pauperism  ? 

When  were  postal  savings  banks  first  authorized  in  the  United 
States?  Why  does  the  Post  Office  Department  form  a  con- 
venient channel  for  conducting  a  savings  bank  business  ?  What 
steps  must  be  taken  to  deposit  in  a  postal  savings  bank  ?  What 
is  the  minimum  amount  that  may  be  deposited?  What  is  the 
maximum  amount?  What  provision  is  made  for  deposits 
above  the  maximum  amount?  What  interest  is  allowed  on 
postal  savings  deposits  ?  If  such  deposits  are  invested  in  United 
States  bonds,  how  much  interest  is  received  on  the  bonds  ? 

What  difference  is  there  in  the  organization  and  administra- 
tion of  mutual  and  joint  stock  savings  banks?  What  difference 
is  there  in  the  purpose  of  each  organization?  How  is  this 
purpose  reflected  at  times  in  the  nature  of  the  investment  of  the 
funds?  What  are  the  functions  of  the  receiving  teller,  the  pay- 
ing teller,  the  cashier,  and  the  president  of  such  institutions? 
What  steps  must  be  taken  in  opening  a  savings  bank  account  ? 
What  information  must  be  given  to  the  bank?  How  does 
the  opening  of  a  savings  bank  account  differ  from  the  opening  of 
a  commercial  bank  account  ?  Why  is  a  savings  bank  not  to  be 
expected  to  receive  credit  instruments  on  deposit,  or  to  permit 
the  use  of  checks  on  account  ?  Why  is  it  essential  in  a  savings 
bank  business  that  funds  shall  not  be  withdrawn  without  notice? 
What  steps  must  be  taken  in  withdrawing  money  from  a  savings 
bank?  What  steps  must  be  taken  to  withdraw  money  if  the 
depositor  is  at  a  distance? 

How  does  a  savings  bank  dispose  of  the  funds  turned  over  to 
it?  What  kind  of  loans  may  a  savings  bank  make?  What 
limitations  upon  savings  bank  loans  and  investments  are  made 
by  your  state  through  its  legislation?  What  security  must  be 
given  by  a  private  individual  in  borrowing  from  a  savings  bank  ? 
For  what  length  of  time  are  such  loans  made?  How  does  a 
savings  bank  make  its  profit  ?     What  difference  is  there  in  the 


200  Supplementary  Questions 

distribution  of  profits  by  trustee  and  joint  stock  savings  banks? 
To  whom,  and  in  what  form,  does  the  surplus  go? 

COOPERATIVE  BANKS  AND   BUILDING   AND   LOAN 
ASSO'~XATIONS 

What  is  a  building  and  loan  association?  Out  of  what  need 
did  it  grow?  How  does  its  service  differ  from  that  of  a  savings 
bank  ?  Why  is  its  service  especially  important  to  th  i  wage 
earner  ? 

How  are  the  privileges  of  a  building  and  loan  association  to 
be  obtained  ?  What  conditions  control  membership  ?  What  is 
a  share  of  stock?  What  three  values  does  a  share  of  building 
and  loan  stock  show ?  What  is  meant  by  its  "par  value "  ?  By 
its '"paid-in  value"?  By  its  "maturity  value"?  What  is 
meant  by  a  "series"?     As  a  rule,  how  often  is  a  series  issued? 

What  is  the  organization  of  a  building  and  loan  association  ? 
What  is  the  function  of  the  various  officers?  What  are  the 
advantages  of  belonging  to  a  good  building  and  loan  association  ? 
Why  is  it  possible  for  such  an  association  to  earn  a  higher  rate 
of  return  on  savings  than  the  ordinary  type  of  savings  bank 
earns?  How  does  a  building  and  loan  association  invest  its 
funds  ?  Under  what  conditions  may  a  member  borrow  from  the 
association  ?  When  there  are  several  applicants  for  loans,  what 
are  some  of  the  methods  followed  in  the  United  States  for 
deciding  which  member  is  to  have  the  benefit  of  the  loan? 
What  security  must  be  given  for  the  payment  of  loans?  If  a 
member  borrows  on  the  security  of  his  shareholdings,  approxi- 
mately what  proportion  in  funds  may  he  obtain  ?  If  he  borrows 
on  a  security  of  real  property,  for  what  purpose  may  the  funds 
be  expended?  How  may  membership  in  a  building  and  loan 
association  be  discontinued  ?  What  disadvantage  to  the  mem- 
ber is  there  in  discontinuing  his  membership  before  the  maturity 
of  the  shares? 

What  is  done  in  a  building  and  loan  association  when  the 
series  matures?     How  long  does  it  take,  on  the  average,  for  a 


Insurance  Principles  201 

series  to  mature?     How  is  settlement  made  with  a  member  at 
the  maturing  of  the  series  in  which  he  holds  shares? 

PRIVATE   BANKS 

What  field  of  banking  is  to-day  largely  in  the  hands  of  private 
banks  ?  What  important  function  is  performed  by  those  private 
banks  which  are  engaged  chiefly  in  marketing  stocks  and  bonds? 
What  is  the  function  of  those  engaged  chiefly  in  foreign  ex- 
change ?  In  general,  to  what  extent  are  private  banks  of  impor- 
tance in  the  personal  affairs  of  an  individual  ? 

What  is  a  letter  of  credit  ?  How  does  it  insure  to  the  holder 
funds  of  the  proper  kind  in  foreign  communities  ?  What  steps 
must  be  taken  to  secure  a  letter  of  credit?  What  charge  is 
made  for  one  ?  What  becomes  of  the  balance  of  a  letter  of  credit 
if  the  full  amount  of  it  is  not  spent  ?  What  is  an  international 
or  traveler's  check  ?  How  does  it  differ  in  character  from  a  letter 
of  credit?  Why  does  a  traveler's  check  have  some  advantages 
over  a  letter  of  credit  ?     Some  disadvantages  ? 

Name  some  other  important  agencies  which  make  a  point  of 
providing  means  for  persons  traveling  in  foreign  communities. 

INSURANCE   PRINCIPLES 

What  is  insurance?  What  condition  of  affairs  makes  insur- 
ance necessary?  How  does  insurance  prevent  the  individual 
from  suffering  an  overwhelming  loss?  How  is  this  object 
accomplished  ?  What  is  an  insurance  risk  ?  How  can  a  group 
assume  such  a  risk  with  advantage?  Why  is  insurance  risk 
carried  by  a  large  group  less  costly  than  when  carried  by  a  small 
group?     What  should  be  the  size  of  the  insurance  group? 

What  is  the  scientific  basis  of  insurance?  How  is  this  cal- 
culated? What  is  a  premium?  What  is  an  insurance  policy? 
What  is  assessment  insurance  ?  What  is  said  to  be,  under  given 
conditions,  an  advantage  in  assessment  insurance?  What  is 
generally   its   great   disadvantage?     What   is   level   premium 


202  Supplementary  Questions 

insurance?  How  is  it  possible  to  calculate  level  premium 
insurance?  What  are  some  of  the  important  advantages  of 
level  premium  insurance?  Under  what  conditions  does  the 
a;)plication  of  level  premium  insurance  lead  to  more  or  less  costly 
insurance  ? 

How  do  the  stock  company,  the  mutual  company,  and  the 
straight  mutual  association  differ  in  organization?  What  was 
the  original  type  of  insurance  organization?  What  was  the 
forerunner  of  the  Lloyd  System  of  the  present  day?  What  is 
the  relationship  between  the  insured  and  the  insurer  under  the 
organization  of  a  stock  company?  Under  a  straight  mutual 
association?  How  did  the  mutual  company  develop?  What 
was  the  effect  of  competition  between  the  stock  companies  and 
the  mutual  companies?  How  do  the  stock  companies  and  the 
mutual  companies  dififer  to-day?  What  advantages  have 
accrued  to  the  insured  as  a  result  of  competition  between  the 
•  stock  companies  and  the  mutual  companies?  Along  what  lines 
have  straight  mutual  associations  continued  to  flourish? 

LIFE  AND  ACCIDENT   INSURANCE 

Into  what  two  general  fields  may  life  insurance  be  divided  ? 
Distinguish  between  ordinary  life  and  industrial  insurance. 
In  general,  to  what  social  groups  is  industrial  insurance  of 
particular  importance?  What  controls  the  amount  of  the 
policy  in  the  case  of  industrial  insurance?  In  the  case  of 
standard  insurance?  What  is  a  mortaUty  table?  About  what 
is  the  estimated  mortality  rate  in  a  group  of  people  of  the  age 
of  eighteen?  Of  the  age  of  thirty?  Of  the  age  of  forty?  Of 
the  age  of  fifty?  In  calculating  level  premiums,  to  what  age 
is  the  general  duration  of  human  life  assumed  to  extend? 
What  effect  will  the  increase  in  the  length  of  human  life,  due 
to  improved  health  conditions,  have  upon  the  mortality  risk? 
Flow  will  this  affect  the  real  cost  of  insurance?  How  do  im- 
proved health  conditions  make  life  insurance  more  profitable? 


Fire  Insurance  203 

What  preliminary  steps  are  necessary  for  taking  out  life 
insurance  ?  Why  is  a  preliminary  examination  by  a  disinterested 
physician  a  good  thing  ?  When  active  application  is  made  to  an 
insurance  company,  what  are  some  of  the  important  aspects  of 
life  on  which  the  company  must  be  satisfied  ?  What  is  the  effect 
of  untruthfulness  or  failure  to  answer  correctly  information 
asked  by  the  company  ? 

What  is  a  whole-life  policy?  What  is  term  insurance? 
What  is  endowment  insurance?  What  difference  is  there 
between  the  ordinary  whole-life  policy  and  the  limited-payment 
life  policy?  To  what  circumstances  of  human  life  is  each  type 
of  life  insurance  best  suited?  What  are  desirable  features  of  a 
life  insurance  contract?  What  is  meant  by  "freedom  from 
restrictions"?  By  "non-forfeiture  privileges"?  By  "liberal 
convertibility  privileges"? 

What  is  an  annuity  ?  How  is  it  related  to  the  ordinary  forms 
of  insurance?  Under  what  circumstances  would  the  taking  out 
of  an  annuity  be  advisable?  What  is  the  approximate  cost  of 
an  annuity  that  would  produce  $600  a  year  at  the  age  of  50  ? 
What  financial  advantage  do  annuities  generally  have  over 
funds  put  into  general  savings  institutions  ? 

What  is  accident  insurance?  What  strict  principle  limits 
such  policies?  In  accident,  as  well  as  in  every  other  form  of 
insurance,  why  is  it  highly  important  to  be  thoroughly  familiar 
with  the  policy  or  the  contract  between  the  insured  and  the 
insurer  ? 

FIRE   INSURANCE 

What  is  the  problem  of  fire  insurance?  Why  is  the  period 
of  risk  in  fire  insurance  being  more  and  more  limited  to  one 
year?  Why  is  perpetual  insurance  hazardous  from  the  stand- 
point of  the  company?  Approximately,  what  is  the  fire  loss 
in  the  United  States  each  year?  What  are  some  of  the  most 
important  causes  of  this  fire  loss?  How  does  it  compare  with 
losses  in  European  countries? 


204  Supplementary  Questions 

What  is  the  difference  between  the  open  policy  and  the 
valued  policy?  Why  is  the  valued  policy  opposed  to  the  in- 
terests of  both  the  insured  and  the  insurer  ?  Why  is  the  open 
policy  preferable  from  the  standpoint  of  community  welfare? 
What  are  some  of  the  principles  that  govern  the  right  to  fire 
insurance?  What  is  an  insurable  interest?  Why  is  duplicate 
insurance  opposed  by  the  fire  insurance  companies?  Why  is 
fire  insurance  very  specific  in  the  ground  that  it  covers  ?  Why  is 
it  null  and  void  in  the  face  of  fires  caused  by  political  or  military 
disorders?  What  are  the  important  circumstances  that  render 
a  fire  insurance  policy  null  and  void  ?  How  is  a  dispute  between 
an  insurance  company  and  the  insured  over  the  circumstances  of 
destruction  and  the  amount  of  destruction  generally  settled? 
How  may  fire  insurance  be  discontinued  by  both  parties  to  the 
policy  ? 

GENERAL  PRINCIPLES  OF  PROPERTY 

What  is  the  common  meaning  of  the  term ' '  property ' '  ?  What 
is  the  legal  meaning  ?  In  a  careful  discussion  of  property,  why 
is  it  important  to  keep  in  mind  the  legal  meaning?  What  is' 
the  difference  between  real  and  personal  property  ?  What  is  an 
estate?  What  is  the  difference  between  the  real  estate  and  the 
personal  estate  of  a  person  ?  When  is  a  person  a  freeholder  and 
when  a  leaseholder?  What  is  meant  by  "title  to  property"? 
Why  is  the  question  of  title  to  property  an  important  one  ? 

By  what  processes  may  the  use  of  property  be  transferred? 
Which  of  the  processes  are  most  common  to  the  everyday  cir- 
cumstances of  an  individual?  How  does  an  absolute  right 
differ  from  a  special  right?  In  transfer  of  property,  with  what 
phase  of  law  is  familiarity  essential  ? 

What  is  a  contract  ?  What  are  the  essentials  of  a  contract  ? 
What  persons  are  incompetent  to  contract  ?  What  is  the  effect 
of  a  lack  of  mutual  consent  to  the  agreement,  or  the  presence  of 
misrepresentation,  mistake,  fraud,  undue  influence,  or  duress? 


Bills  of  Sale  and  Deeds  205 

What  is  the  meaning  of  "consideration " ?     What  kind  of  agree- 
ments are  unlawful  as  contracts? 

In  what  three  forms  may  contracts  be  made?  Which  of  the 
three  is  the  best?  While  ordinarily  all  three  forms  may  be 
employed,  under  what  five  specific  kinds  of  agreements  must 
the  contract  be  in  writing?  To  what  extent  is  an  implied 
contract  binding? 

LEASES 

What  is  a  lease?  Who  is  the  lessee?  Who  is  the  lessor? 
In  accordance  with  common  law,  in  what  condition  must 
property  be  when  returned  to  the  landlord  by  the  leaseholder? 
What  are  the  vital  provisions  of  a  lease?  Why  is  it  important 
that  a  lease  shall  contain  these  provisions?  What  are  the  terms 
of  the  lease?  Under  what  conditions  may  the  provisions  of  a 
lease  be  canceled  before  the  expiration  of  the  leasehold  period  ? 

BILLS  OF   SALE  AND   DEEDS 

What  steps  must  be  taken  in  the  sale  of  real  property  ?  What 
is  a  bill  of  sale  ?  Why  is  it  necessary  to  enter  into  a  bill  of  sale  ? 
What  is  the  deed?  What  is  the  difference  between  a  general 
warranty  deed  and  a  quitclaim  deed?  Before  delivery  of 
the  deed,  why  should  the  title  be  searched?  What  institutions 
make  a  specialty  of  searching  titles?  What  claims  constitute 
an  encumbrance  against  real  property?  How  may  such  en- 
cumbrances be  adjusted?  Why  is  it  necessary  to  deliver  the 
deed  in  exchange  of  real  property  before  a  notary  or  other  officer 
of  record  ? 

Why  is  it  well  to  cover  the  title  by  insurance?  What  insti- 
tutions issue  title  insurance  ?  Why  is  it  necessary  to  record  a 
deed  in  the  ofl&ce  of  the  register  and  recorder  of  the  county  in 
which  the  transfer  is  made?  If  a  deed  is  not  recorded  and  a 
second  transfer  is  made  by  the  ordinary  holder  and  the  second 
deed  is  recorded,  which  of  the  two  deeds  is  likely  to  confer  title? 


2o6  Supplementary  Questions 

MORTGAGES 

What  is  a  mortgage?  Who  is  the  mortgagee?  Who  is  the 
mortgagor?  According  to  common  law,  to  what  extent  is  a 
mortgage  a  conditional  transfer  of  property?  What  is  the 
difference  between  a  first  and  a  second  mortgage?  About 
what  proportion  of  residential  property  may  be  placed  under 
first  mortgage  ?  What  is  the  rate  of  interest  common  under  first 
mortgage?  Under  second  mortgage?  What  is  a  foreclosure? 
Why  is  the  mortgage,  modified  by  foreclosure,  a  more  justifiable 
instrument  of  security?  What  steps  must  be  taken  in  fore- 
closure when  interest  or  principal  is  not  paid  when  due?  Why 
is  it  essential  for  the  mortgagor  to  provide  a  policy  of  fire  insur- 
ance?    What  is  the  length  of  term  general  to  mortgages? 

DISTRIBUTION   OF  PROPERTY  ESTATES 

In  the  case  of  property  of  decedents,  what  are  the  two  methods 
of  distribution?  What  is  meant  when  it  is  said  "the  owner  of 
property  dies  intestate  "  ?  What  steps  must  be  taken  in  the  case 
of  property  that  has  not  been  distributed  by  will?  What  is 
an  administrator?  What  is  a  will?  What  is  an  executor? 
What  are  the  duties  of  an  executor  ?  What  steps  must  be  taken 
by  both  the  administrator  and  the  executor  in  distribution  of 
real  and  personal  estates?  Why  does  the  trust  company  play 
an  important  part  in  this  field?  Why  is  this  institution  espe- 
cially qualified  to  act  as  executor  or  administrator? 

TAXATION 

What  is  the  difference  between  direct  and  indirect  taxation  ? 
To  what  extent  does  the  Federal  government  limit  itself  in  the 
utilization  of  these  two  methods  of  taxation?  What  power  is 
given  the  Federal  government  under  the  Sixteenth  Amend- 
ment to  the  Constitution  ?  How  do  the  states  and  local 
governments  defray  their  expenses?  What  specific  forms  of 
taxes  are  collected  in  your  state?    What  method  of  assessing 


Bond  and  Stock  Investments  207 

property  prevails  in  your  community  ?     What  are  some  of  the 
characteristics  of  a  just  tax  ? 

BOND   AND   STOCK  INVESTMENTS 

What  is  the  difference  between  investment  and  speculation? 
What  is  the  principle  that  should  govern  investment?  What 
principle  governs  speculation  ?  Why  is  speculation,  as  a  general 
thing,  a  serious  pursuit  for  the  person  of  ordinary  income  ? 

What  is  a  bond?  What  difference  is  there  between  a  bond 
and  a  promissory  note?  Into  what  general  classes  may  bond 
issues  be  divided?  What  is  the  difference  between  a  coupon 
bond  and  a  registered  bond?  What  advantages  are  attached 
to  the  possession  of  a  coupon  bond?  From  the  standpoint  of 
the  bond  market,  what  five  kinds  of  bonds  are  there  ?  From  the 
standpoint  of  suitability  for  investment,  in  what  order  may  the 
five  be  listed?  From  the  standpoint  of  the  security  that  safe- 
guards the  holder,  into  what  three  groups  may  bonds  be  divided  ? 
What  is  the  security  of  a  government  bond  ?  Why  is  a  govern- 
ment bond  in  the  United  States  regarded  to-day  as  one  of  the 
most  secure  mediums  of  investment  ?  What  is  a  Liberty  bond  ? 
What  is  a  mortgage  bond?  What  steps  are  taken  when  interest 
on  a  mortgage  bond  is  not  paid  ?  When  the  principal  is  due  and 
not  paid?  What  is  the  nature  of  a  debenture  bond?  Under 
what  conditions  are  debentures  desirable  ? 

From  the  standpoint  of  mortgage  security,  what  are  some  of 
the  important  classes  of  bonds?  What  is  the  difference  be- 
tween first  and  second  mortgage  bonds?  What  is  a  general  or 
blanket  mortgage  bond  as  contrasted  with  a  divisional  bond? 
What  is  a  consolidated  bond?  An  equipment  bond?  A 
refunding  bond?  A  convertible  bond?  What  difference  does 
it  make  whether  a  bond  is  repayable  in  gold  or  in  legal  tender  ? 
Wliy  is  a  gold  bond  preferable  from  the  standpoint  of  long-time 
investment  ?  What  will  cause  any  bond  to  fluctuate  somewhat 
above  or  below  its  face  value  ? 


2o8.  Supplementary  Questions 

What  is  a  share  of  stock  ?  In  what  relation  to  the  business  is 
a  stockholder?  How  does  the  position  of  a  stockholder  differ 
from  that  of  a  bondholder?  What  is  a  dividend?  What 
different  types  of  stocks  are  issued  by  a  corporation?  What 
difference  is  there  in  the  rights  of  a  common  stockholder  and  a 
first  or  second  preferred  stockholder?  What  gives  the  general 
market  value  to  a  share  of  common  stock  ?  How  is  this  general 
market  value  influenced  by  artificial  manipulation?  What  is 
meant  by  a  "bull  movement"  in  a  stock  market?  By  a  ''bear 
movement"?  By  a  "straddle"?  Is  common  stock,  generally 
speaking,  a  good  medium  for  investment  or  for  speculation, 
and  why?  Why  are  stocks  and  bonds  generally  called  "securi- 
ties"? In  the  case  of  railroad  securities,  why  are  the  issues 
of  stocks  and  bonds  of  railroads  located  in  certain  districts  of 
United  States  regarded  as  "gilt  edge"?  What,  in  a  general 
way,  insures  the  future  reliability  of  these  stocks  and  bonds? 
What  general  geographical  conditions  in  the  United  States 
make  a  great  difference  in  the  financial  reliability  of  stocks 
and  bonds  ?  Why,  in  general,  do  the  issues  of  stocks  and 
bonds  of  public  utility  corporations  rank  next  to  those  of 
railroads?  What  situation  tends  to  maintain  the  stability  of 
public  utility  issues?  Why  are  the  issues  of  industrials  as  a 
rule  uncertain  in  value?  Why  are  mining  stocks  and  bonds 
often  unsafe  ? 

BOND  AND  STOCK  MARKET 
What  is  a  stock  exchange  ?  What  is  a  stock  and  bond  broker  ? 
What  important  financial  service  is  performed  by  a  stock  ex- 
change ?  What  is  the  general  organization  of  a  stock  exchange  ? 
How  is  business  conducted  on  the  floor  of  a  stock  exchange? 
What  is  the  present  cost  of  a  membership  in  the  New  York 
Stock  Exchange?  What  are  some  of  the  causes  of  fluctuation 
in  the  cost  of  a  membership  in  a  stock  exchange?  How 
are  stocks  and  bonds  purchased  by  private  speculators  and 
investors?     What  charge  is  usually  made  by  brokers  for  carry- 


Mortgages  and  Real  Estate  Investments       209 

ing  out  orders  on  the  floor  of  a  stock  exchange?  What  is 
meant  by  dealing  in  stocks  and  bonds  on  margin  ?  What  is 
the  primary  aim  in  conducting  transactions  in  stocks  and  bonds 
in  this  way?  What  is  the  work  of  an  arbitrage  broker? 
Explain  why  stocks  and  bonds  have  different  market  values  in 
different  communities.  What  is  meant  by  a  curb  market? 
In  what  respects  does  the  curb  market  differ  from  the  exchange 
market  ?  Are  stocks  and  bonds  not  listed  on  an  exchange  neces- 
sarily unreliable  or  unsafe?  What  is  meant  by  underwriting? 
By  an  underwriting  syndicate?  How  do  private  banks  ex- 
pect to  make  a  profit  by  the  process  of  underwriting? 

MORTGAGES  AND  REAL  ESTATE  INVESTMENTS 

From  the  point  of  view  of  an  investor,  how  does  a  mortgage 
diflfer  from  a  bond  ?  What  advantages  and  what  disadvantages 
does  the  former  show  in  comparison  with  the  latter  ?  Why  is 
a  mortgage  on  land  more  reliable  than  one  on  buildings  and 
improved  real  estate?  In  the  settlement  of  mortgage  claims, 
what  is  the  difference  between  the  rights  of  a  holder  of  a  first 
and  the  holder  of  a  second  mortgage  ?  Under  what  conditions 
in  a  community  or  a  section  of  a  city  is  a  second  mortgage 
reasonably  safe  as  an  investment  ?  In  purchasing  real  estate 
as  an  investment,  what  two  specific  clauses  must  be  considered  ? 
Why  is  the  purchase  of  unimproved  real  estate  more  or  less 
speculative  in  character?  What  general  factors  underlie  an 
increase  in  the  market  value  of  real  estate  ?  What  is  meant 
by  unearned  increment?  Why  is  dealing  in  real  estate  as 
an  investment  usually" troublesome  to  a  small  investor?  To 
what  extent  is  there  an  open  and  continuous  market  in  the 
field  of  mortgage  and  real  estate  investments  ?  Why  is  it  diffi- 
cult to  maintain  a  real  estate  exchange  on  the  plan  of  a  stock 
exchange  ?  What  is  the  work  of  a  real  estate  broker  ?  In  gen- 
eral, why  is  a  trust  company  a  good  agency  to  consult  in  in- 
vesting in  mortgages  and  in  real  estate  ? 

EL.   OF   BUS.  — 14 


REFERENCE  BOOKS 

As  the  subject  matter  of  this  manual  covers  so  broad  a 
field,  it  has  not  been  possible  to  present  any  portion  of  it  as 
fully  as  its  importance  warrants.  If  the  pupils  have  time 
and  access  to  a  fairly  large  library,  much  additional  material 
will  be  found  in  the  books  here  named  as  well  as  in  other 
books,  periodicals,  and  encyclopedias.  Elementary  books 
on  business  law  will  be  of  special  value.  Statistical  infor- 
mation that  may  be  needed  can  be  obtained  from  a  current 
yearbook  or  from  the  reports  issued  by  state  and  Federal 
authorities.  Classroom  work  can  be  made  more  real  and 
interesting  by  placing  in  the  hands  of  each  pupil  copies 
of  the  instruments  and  documents  involved  in  the  discus- 
sions. These  can  generally  be  obtained  from  banking  and 
insurance  institutions  or  from  printing  and  lithographing 
estabhshments. 

The  following  books  are  suggested  for  supplementary 
class  use,  those  marked  with  a  star  being  particularly  suit- 
able and  useful : 

Annals,  American  Academj'  of  Political  and  Social  Science: 

*  Bonds  as  Investment  Securities. 

*  Insurance. 

Babsont,  R.  W.  :    Bonds  and  Stocks ;    The  Elements  of  Successful 

Investment. 
Bagehot,  Walter  :  Lombard  Street. 
*  Barrett,  A.  R. :   Modern  Banking  Methods. 
Bolles,  a.  S.  :    Practical  Banking. 
BoNT3,  F.  D. :   Stock  Prices;   Factors  in  Their  Rise  and  Fall. 

2IO 


Reference  Books  2 1 1 

BuRDiCK,  F.  M. :   Essentials  of  Business  Law. 

*  Cannon,  James  G.  :   Clearing  Houses. 

*  Chamberlain,  Lawrence  :  Principles  of  Bond  Investment. 

Work  of  the  Bond  House. 
Clay,  Paul  :  Sound  Investing. 

*  Cleveland,  F.  A. :   Funds  and  Their  Uses. 

*  Coffin,  G.  M.  :  A  B  C  of  Banks  and  Banking. 

*  Conant,  C.  a.  :   History  of  Modern  Banks  of  Issue. 

Principles  of  Money  and  Banking. 
Conway,  Thos.,  Jr.,  and  Patterson,  E.  M.  :   Operation  of  the  New 

Bank  Act. 
Cooper,  Francis  :  Financing  an  Enterprise. 
Dunbar,  C.  F.  :  Chapters  on  the  Theory  and  History  of  Banking. 
Eliason,  a.  0. :    Rise  of  Commercial  Banking  Institutions  in  the 

United  States. 
Ely,  R.  T.,  and  Wicker,  G.  R.:  Elementary  Principles  of  Economics. 
Escher,  Franklin  :  Practical  Investing. 
Fisher,  Irving,  and  others :   How  to  Invest  When  Prices  are  Rising. 

*  FiSKE,  A.  K. :  The  Modern  Bank. 
Fowler,  N.  C.  :  How  to  Save  Money. 

*  Gano,  D.  C.  :  Commercial  Law. 
Gephart,  W.  F.  :  Principles  of  Insurance. 

*  Hamilton,  J.  H. :   Savings  and  Savings  Institutions. 

Harris,  R.  S.  :    Practical  Banking ;    with  a  Survey  of  the  Federal 

Reserve  Act. 
Hendrick,  B.  J. :  Story  of  Life  Insurance. 

*  HoLDSWORTH,  J.  T. :   Money  and  Banking. 

*  HuEBNER,  Solomon  :  Life  Insurance. 

*  Property  Insurance. 
Jack,  A.  F. :   Introduction  to  the  History  of  Life  Assurance. 

*  KiRKBRiDE,  F.  B.,  and  Sterrett,  J.  E. :   The  Modern  Trust  Com- 

pany. 
Kniffin,  W.  H.,  Jr. :  Practical  Work  of  a  Bank. 

*  Marcosson,  I.  F. :  How  to  Invest  Your  Savings. 

*  Mead,  E.  S.  :   The  Careful  Investor. 

Moody,  John:    Analyses  of  Investments,  1913-17;    Manual,  Com- 
plete List  of  Securities,  1917. 

The  Art  of  Wall  Street  Investing. 


212  Reference  Books 

*  Nichols,  F,  G.,  and  Rogers,  R.  E.  :  A  Short  Course  in  Commercial 

Law. 
Poor  and  Sons  :  Manual  of  Industrials. 
Pratt,  A.  S.,  and  Sons  :  Digest  of  Laws  Relating  to  National  Banks. 

*  Pratt,  S.  S.  :  Work  o£  Wall  Street. 

Rollins,  Montgomery  :  Money  and  Investments. 

*  Rosenthal,  H.  S.  :   Building,  Loan,  and  Savings  Associations. 
Scott,  W.  A. :   Banking. 

Money  and  Banking. 
Sullivan,  John  :  American  Business  Law. 

*  White,  Horace  :  Money  and  Banking. 
Zartman,  L.  W.  :   Fire  Insurance. 

Life  Insurance. 
Property  Insurance. 


INDEX 


Acceptance,  defined,  21 

discounting  of,  61 

dishonor  of,  31 

liability  of  indorsers,  31 

non-payment  and  protest  of,  31 

settlement  of,  21 

trade,  22 
Accident  insurance,  88,  89 
Accommodation  loan,  58,  59 
Account,  cash,  176,  181 

earnings,  177,  182  ' 

expense,  177,  181 

furniture  and  equipment,  178,  182 

profit  and  loss,  183 

resources  and  liabilities,  184 

statement  of,  1:6 
Accounting,  elementary  principles  of,  173- 

rule  of  debiting  and  crediting  in,  174 
Accounts,  165-186 

book, 174 

closing  a  set  of,  179 

determining  net  profit  or  loss  by,  183 

determining  net  worth  by,  183 

determining  resources   and   liabilities 
184 

impersonal,  174 

organizing  a  set  of,  176 

personal,  174 

trial  balance  of,  180 
Annuity,  87 
Assignment  of  bills,  17 
Auction  block,  137 

Bank  draft,  53 
Banking,  35-76 

origin  and  development  of,  35 

principles  of,  35 
Banks,  commercial,  36,  38-58 

cooperative,  37,  68-73 

national,  36,  39 

private,  37,  73-76 

savings,  37,  62-67 


Banks — Continued 

state,  36 

trust  company,  37 

(See    commercial,    savings,     and     private 
banks,  and  trust  companies) 
Barter,  7 
Bill,  assignment  of,  17 

defined,  14,  15 

receipting,  14 
Bill  of  lading,  22 

with  draft  attached,  22 
Bill  of  sale,  103,  104 
Bonds,  car  trust,  127 

collateral  trust,  127 

consolidated  mortgage,  127 

convertible,  127 

coupon,  125 

debenture,  127 

equipment,  127 

first  mortgage,  126 

general  mortgage,  127 

government,  127 

industrial,  129 
by,        kinds  of,  125 

merits  of,  127 

municipal,  128 

nature  of,  123 

public  utility,  128 

purchase  of,  134 

railroad,  128 

refunding,  127 

registered,  126 

second  mortgage,  127 

state,  128 

utility,  128 
Borrowing,  from  a  building  and  loan  associa- 
tion, 70,  71 

from  a  commercial  bank,  58-61 

from  a  savings  bank,  67 

on  promissory  notes,  24-29 
Building   and   loan    associations,    borrowing 
from,  70 
213 


214 


Index 


Building  and  loan  associations  —  Continued 

discontinuance  of  membership,  71 

function  of,  37,  68 

membership  advantages  of,  69 

organization  of,  68 

shares  of,  69 
Business  customs  and  institutions,  10 
Business  exchange,  7 
Business  letters,  144-164 

body,  149 

complimentary  close,  150 

heading,  146 

inside  address,  147 

parts  of,  145 

points  to  be  observed  in  writing,  144 

salutation,  148 

signature,  150,  151 

Cablegram,  157,  158 

Cash  account  records,  165-173 

Cash  book,  classification,  167-169 

described,  165,  166 

household  classification,  171 
Cashier's  check,  51 
Certificate  of  deposit,  52 
Certified  check,  50 
Check,  certified,  50,  51 

commercial  bank,  46 

numbering  of,  49 

stub  of,  48 

transfer  of,  49 

uses  of,  47,  49 
Circular  letter  of  credit,  74,  75 
Clearing  house,  55 
Coins,  United  States,  11,  12 
Commercial  banks,  balancing  account  with, 
43 

checks  on,  44 

collection  charges  of,  57 

collections  and  settlements  of,  54 

depositing  in,  43,  44 

discounting  at,  58 

items  that  may  be  deposited  in,  43 

kinds  of,  38 

loans  of,  58 

national  bank  system,  39 

nature  of,  38 

opening  an  account  at,  42 

organization  of,  41,  42 

passbook  of,  43 

services  of,  36,  39 

stat>;ment  of  depositor's  account,  43 


Commercial  draft,  collection  and  settlement 
of,  19,  21 

defined,  19 

discounting,  61 

dishonor  of,  31 

kinds  of,  20 

liability  of  indorsers,  31 

non-payment  and  protest  of,  31 

parties  to,  19 

uses  of,  19,  21 
Contract,  defined,  97 

essentials  of,  97 

kinds  of,  98 

under  seal,  99 

written,  99 
Cooperative  banks 

(See  building  and  loan  associations) 
Correspondent  bank  system,  57 
Credit,  defined,  9 

extent  of  use  of,  9 
Curb  market,  137 

Day  letter,  159 
Deed,  parties  to,  104 

quitclaim,  104 

recording  of,  106 

warranty,  104,  105 
Discount,  bank,  61 

cash, 17 

trade,  17 
Discounting  acceptances,  drafts,  and  promis- 
sory notes,  61 
Distribution  of  property,  no 
Dollar,  United  States,  11,  12 
Draft,  bank,  53 

commercial  (See  commercial  draft) 

New  York,  53 

Envelope,  addressing  of,  152-154 
Equity,  in  mortgaged  property,  109 

of  redemption,  120 
Estate,  distribution  of,  110-114 

procedure  under  will,  112 

procedure  when  there  is  no  will,  112 
Exchange,  business  of,  7 

medium  of,  8 

Federal  reserve  note,  13 

Federal  Resen'e  System,  described,  40 

districts  of,  40 

purpose  of,  40 

reserve  centers  of,  40 


Index 


215 


Fire  insurance,  nature  of,  90 
policies  of,  91,  92 
rates  and  terms  of,  94 

Gold,    reasons    for    use    as  monetary  unit, 

8,9 
Gold  certificate,  United  States,  12 
Gold  coins,  United  States,  11 
Greenback  note,  United  States,  12 

Indorsement,  blank,  30 

defined,  30 

full,  30 

qualified,  31 

restrictive,  30 
Indorser,  liability  of,  31 
Insurance,  77-95 

assessment,  79 

level  premiiim,  79 

nature  of,  77 

organization  of,  79 

scientific  basis  of,  78 

{See  accident,  fire,  and  life  insurance) 
Interest,  on  savings  banks  accounts,  67 
International  check,  75 

Investment   and   speculation,   difference   be- 
tween, 122,  123 
Investments,  122-143 
Invoice,  14 

Joint  stock  savings  banks,  63 
Judgment,  confession  of,  28 
Judgment  note,  28,  29 

Landlord,  101 
Lease,  parties  to,  loi 

terms  of,  102 

vital  provisions  of,  loi 
Legal  tender,  13 
Letter  of  introduction,  156 
Letter  of  recommendation,  156 
Letter  writing  (See  business  letters) 
Liabilities,  determination  of,  184 
Life  insurance,  beneficiary  of,  84 

desirable  features  of,  87 

endowment,  85 

industrial,  82 

limited  payment,  85 

mortality  table  of,  82,  83 

ordinary  whole  life,  81,  85 

policies  of,  86 

preliminary  steps  in,  83 

premiums  of,  79 


Life  insurance  —  Continued 

selecting  a  policy  of,  86 

term,  85 
Loan,  accommodation,  58,  59 

building  and  loan  associations,  70,  71 

call,  sS 

collateral,  60 

commercial  bank,  58 

savings  bank,  67 

security  for,  27,  60,  67,  71 

time,  58 
Loss,  determination  of,  183 

Medium  of  exchange     (See  money) 
Money,  7,  8 

development  of,  8 

functions  of,  7,  11 

United  States  system  of,  11-13 
Mortality  table  of  life  insurance,  83 
Mortgage,  chattel,  108 

defined,  107 

equity  under,  109 

first,  108 

foreclosure  proceedings,  107 

investing  in,  139,  142 

nature  of,  107 

parties  to,  107 

pertinent  facts  concerning,  109 

real  estate,  108 

second,  108,  140 
Mutual  savings  banks,  63 

National  bank  note,  13 

National  bank  system,  deficiencies  of,  40 

origin  and  purpose  of,  39 
Night  letter,  158 
Note,  promissory,  accommodation,  28,  58 

collateral,  28,  60 

collection  of,  54 

defined,  24 

demand,  27 

dishonor  of,  31 

important  features  of,  25 

indorsed,  28 

joint,  27 

joint  and  several,  27 

judgment,  28,  29 

kinds  of,  26,  27 

liability  of  indorsers,  31 

nature  of,  24 

negQtiable,  27 

non-negotiable,  27 

non-payment  and  protest  of,  31 


2l6 


Index 


Note  —  Continued 
parties  to,  24 
security  of,  27 
time,  27 

Personal  estate,  96 

Personal  property,  96 

Postal  information,  154-136 

Postal  savings  banks,  62 

Private  banks,  field  of  activity  of,  73 

function  of,  37 

letter  of  credit  of,  73,  74 

traveler's  checks  issued  by,  75,  76 
Profit,  determination  of,  183 
Promissory  note     {See  note,  promissory) 
Property,  96-121 

absolute  rights  in,  96 

freeholder  and  leaseholder  of,  97 

nature  of,  96 

personal,  96 

personal  estate  in,  96 

title  to,  97 

transfer  of  title  to,  97 

(See  contract,  lease,  deed,  mortgage,  and 
distribution  of  property) 
Protest,  non-payment,  31-33 

Real  estate,  defined,  96 

investment  in,  141,  142 
Real  property,  96 
Receipt,  form  of,  18 
Receipting  bills,  15 
Records,  cash  account,  163-173 
Reference  books,  209-211 
Reserve  note.  Federal,  13 
Resources,  determination  of,  184 

Savings  banks,  borrownng  from,  67 

defined,  37,  62 

distribution  of  interest  by,  67 

joint  stock,  63 

kinds  of,  62 

mutual,  63 

nature  of,  62 

opening  an  account  at,  64 

organization  of,  63 ,  64 

postal,  62 

withdrawing  funds  from,  65,  66 
Securities,  10,  28,  60 
Silver  certificate.  United  States,  12 
Silver  dollar,  11 

Speculation  and  investment,  122-143 
Statement  of  account,  16 


Stock  exchange,  defined,  135 

New  York,  136 
Stocks,  auction  block,  137 

bank, 133 

common,  131 

cumulative  preferred,  13a 

curb  market,  137 

industrial,  134 

kinds  of,  131 

merits  of,  132 

mining,  134 

nature  of,  129 

preferred,  131 

purchase  of,  134 

railroad,  133 

stock  exchange,  I3S-I37 

tractions,  134 

trust  company,  133 

utility,  134 

watered,  132 
Supplementary  questions,  187-209 

Taxes,  assessment  of,  119 

customs  or  duties,  115,  116 

direct,  115 

equity  of  redemption  under,  120 

Federal,  iis 

income,  116,  117 

internal  revenue,  118 

legacy,  118 

local,  119 

poll,  1. 10 

state.  119 

tariff,  IIS 
Telegram,  157,  is8 
Tenant,  loi 
Title  insurance,  106 
Title  to  property,  97 
Trade  acceptance,  22 
Traveler's  check,  75 
Treasury  note.  United  States,  12 
Trust  company,  as  trustee,  executor,  and  ad 
ministrator,  113 

defined,  37,  113 

functions  of,  38 

relation  to  banking,  37 

Usury,  26 

Will,  administering  and  executing  of,  112 

making  of,  no 
Wireless  message,  157 
Worth,  determination  of  net,  183 


Wl 


Tcuiui^HL  LiDnanr  rHuiLi  i  T 


AA    001018  466 


Vr 


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